As I've mentioned in another thread (America Alone) there is a restrengthend movement of neo-nationalism in Europe.? Not mentioned in this news is that the policeman was coloured.

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Paris fan shot dead by policeman

A French football fan has been shot dead by a plain-clothed police officer after a European football match.The officer reportedly fired tear gas, then live ammunition in an effort to disperse a fighting crowd near Paris' Parc des Princes football stadium.

The group of 150 Paris Saint Germain supporters were surrounding a fan of the Israeli team Hapoel Tel Aviv, who had beaten PSG 4-2 in the Uefa Cup.

An investigation has been launched into the shooting, police said.

Paris Saint Germain fans have a reputation for violent incidents, with the club disciplined over their behaviour several times in the past.

Cornered

The skirmish broke out by the Parc des Princes in the aftermath of PSG's defeat.

The police officer, who has not been identified, threw tear gas to break up a group of Paris fans surrounding the Israeli.

The officer was then chased towards a McDonald's restaurant nearby, holding the crowd at bay with his firearm before firing at least two shots, reports said.

Police union official Luc Poignant told the AFP news agency that the officer "had no choice but to defend himself and protect another person".

There was an atmosphere of high tension among Paris fans immediately after the game, which continued a poor run of form for the team.

AFP quoted witnesses describing a climate of "extreme confusion" in the streets.

Police reinforcements were sent to the area in an effort to calm the violence in the moments after the Paris fan was shot.

French security and sports officials condemned racist violence by a mob of soccer fans in the capital Friday after a black police officer seeking to protect a Jewish fan of a visiting Israeli team shot and killed one man and wounded another.

The officer, Antoine Granomort, 32, rushed to the aid of a French fan of the Hapoel Tel Aviv club late Thursday after the Israeli team defeated Paris Saint-Germain in a UEFA Cup match, according to the police and witnesses.

About a hundred fans cornered the two men near the Parc des Princes, the stadium in Paris where the game was played, shouting racist and anti-Semitic epithets at them and making Nazi salutes, according to the accounts. When they began beating Granomort and threatening to kill the fan, the officer fired his service revolver.

A 25-year-old man was killed and another man, 26, was wounded. Both victims were identified by the police as members of a far-right group supporting Paris Saint-Germain, a club that has a long history of hooliganism among its fans.

"The seriousness of this event confirms the absolute necessity of fighting racism and anti-Semitism among PSG supporters," the mayor of Paris, Bertrand Delano?, said in a statement.

The Paris authorities have long grappled with hooligan violence in the capital, but tougher legislation has so far failed to stamp it out. There have been at least six incidents of major fan violence involving PSG supporters over the past 14 months.

Overt racism is a common occurrence at the Parc des Princes, the home stadium of PSG, with fans mocking black players with monkey chants and far-right slogans.

Interior Minister Nicolas Sarkozy, who has called himself a PSG fan, has vowed to clamp down on the violence.

Granomort, who was in custody Friday while magistrates investigated his assertion that he had acted in self-defense, was backed by fellow police officers, who stressed his right to self-defense.

The violence began around 10:50 p.m. Thursday, according to Philippe Brossard, a journalist for the magazine L'Express who witnessed the incident.

Dozens of angry PSG fans started pursuing Yanniv Hazout, a Frenchman who supported the Tel Aviv team, as he made his way to a M?tro station near the stadium.

Assigned to guard a nearby parking lot, Granomort, a plainclothes officer, first sought to stop the fans with a tear gas canister.

"He said several times: 'Stay behind me! Stay behind me!'" Brossard wrote in his account on the Web site of L'Express.

"The attackers move in on him, insult him," he wrote. "He retreats, panics, tries to leave to the right, loses his tear gas canister, picks it up again, retreats again. The mob continues to move closer."

According to Sarkozy, some fans shouted "Death to the Jew!" before attacking Hazout. Granomort was kicked and beaten before falling to the ground and drawing his weapon, the interior minister said.

Riot police are a common sight at the Parc des Princes. PSG has several factions of unruly fans, but one of the most notorious is the "Kop Boulogne," a group known for its allegiance to far- right parties like the National Front of Jean-Marie Le Pen.

Thirty PSG fans have been formally barred from entering the stadium, and some are under orders to present themselves to the police during matches. But dozens of other hooligans continue to attend, often clustering in a corner of the grandstand.

Fr?d?ric Thiriez, president of the French professional football league, said he was stunned by what had happened.

"Football is not about hatred," he said in a statement Friday. "Football cannot be war."

Following up on the Danish cartoon provacateurs (sp?) :================

"Sex in the Park" By Henrik BeringThe Weekly Standard | November 24, 2006

(Copenhagen) - You have to hand it to them: Few men in recent history have been more successful in creating mayhem than the small group of Denmark-based imams who turned the appearance of cartoons of Muhammad in a Danish newspaper into a world event. In a recent Egyptian opinion poll of nations seen as most hostile, Denmark registered third, right behind the United States and Israel, an impressive score for a small Nordic country that is normally known for its pacifism and humanitarian efforts.

Pretending to be on a mission to create understanding and dialogue, the imams set out from Denmark for the Middle East last December, where they spread false rumors of the Koran being burned on the streets of Copenhagen and otherwise did their best to incite violence against their host nation, resulting in attacks on embassies, trade boycotts, and flag burnings. They were later caught on hidden camera by a French documentary filmmaker, bragging about their exploits.

Not ones to rest on their laurels, this band of bearded brothers have continued to enjoy great success at getting their names into the headlines; their activities have been followed with particular interest by the Jyllands-Posten, the paper that originally published the cartoons and has had to live under a strict security regimen ever since. As always, there is an element of Monty Pythonesque farce in these imams posturing as holy warriors while being welfare-state spongers, and constantly tripping up in their own lies. Farce, that is, if it were not so deadly serious.

First a bit of good news: As reported in the Jyllands-Posten, Sheikh Raed Hlayhel, who has been in Denmark since 2000 and was the prime instigator behind the cartoon protest, recently announced that he had had it with Denmark and was leaving to settle down in his hometown of Tripoli in Lebanon. "And I am not coming back," he fumed, as if depriving the country of some tremendous cultural asset.

As a commentator noted, Hlayhel has not exactly been a model of successful integration. Having received his religious training in Medina in Saudi Arabia--where he imbibed pure, unadulterated Wahhabism--Hlayhel applied for asylum in Denmark and was at first denied. But as his young son suffers from spina bifida, and the Danish authorities felt the boy could not get the proper treatment in Lebanon, he was allowed in on humanitarian grounds.

Hlayhel thus did not have Danish citizenship and did not speak a word of Danish. But in Denmark's fundamentalist parallel society, Arabic will do just fine, especially when you preach jihad. The center of Hlayhel's activities was the Grimh?jvej mosque in the small town of Brabrand in Jutland, which has been closely monitored by Danish intelligence.

Among the users of the mosque were Slimane Hadj Abderrahmane, the so-called Guant?namo Dane--a holy warrior of Danish/Algerian parentage who was caught by American troops in Afghanistan--and Abu Rached, who has been identified by Spanish prosecutors as one of al Qaeda's main operatives in Europe.

What prompted Hlayhel's decision to pull up his tent pegs? He lost his lawsuit against the Jyllands-Posten for having printed the cartoons. And in matters like these, family considerations are clearly secondary. About his invalid son, who was receiving free care from the Danish national health system, Hlayhel stated, "His Muslim identity is more important than his treatment. I think all Muslims should live in a Muslim country. Farewell Denmark."

But before the Danes get too relieved, intelligence experts cited in the Jyllands-Posten warned that the sheikh can still make mischief from the Middle East. In his last prayer in Denmark, Hlayhel denounced the pope, warned against repetitions of the cartoons, and threatened retaliation: "We are people who love death and will sacrifice ourselves before Allah's feet. Do not repeat the tragedy, or else it will become a tragedy for you and the whole world."

Meanwhile, Hlayhel's fellow demagogue Ahmed Abu Laban, a Palestinian refugee who came to Denmark in 1984 and who is also not a Danish citizen, has written a book about the traveling imams' achievements entitled The Jyllands-Posten Crisis, which has come out so far only in Arabic and has been published in the Egyptian newspaper Al-Masri al-Youm.

Laban rails against a new group in Denmark called the Democratic Muslims, which was created in the wake of the cartoon crisis and whose leader, Naser Khader, he describes as "a rat" and "an apostate." This, according to a scholar cited in the Jyllands-Posten, amounts to a death threat, as in the fundamentalist view apostasy is a capital crime. Democratic Muslims are further characterized in the book as "such nice people, clean shaven, very clever, who are ready to have sex in the park, whenever they feel like it." The phrase "sex in the park" is common Arab code for homosexuality, which in sharia law also merits a death sentence.

Laban's name has been linked to Omar Abdel Rahman, the blind cleric who in 1993 was behind the first bombing of the World Trade Center; to Ayman al-Zawahiri, one of the planners of 9/11; and to Mohammed al-Fizazi, who was responsible for the 2003 Casablanca bombing. Laban at one point also claimed knowledge of an imminent terror operation on Danish soil.

His purpose with the book is to strengthen his own claims to leadership in the highly competitive world of extremist imams. Laban has also threatened in the past to leave Denmark, but, alas, thought better of it.

Downy bearded youth was also represented in the traveling cartoon road show in the person of 28-year-old Ahmed Akkari, who makes up for his tiny stature and squeaky voice with his great persistence. Akkari was born in Lebanon but has obtained Danish citizenship and is fluent in Danish. Among his political prognostications is that the leader of the Democratic Muslims would be blown up, should he ever become a government minister.

Most Danes were of the impression that Akkari had left the country last year to settle with his girlfriend in Lebanon, as he, too, felt insufficiently appreciated in Denmark. But lo and behold, when Denmark arranged for an evacuation of 5,000 people during this summer's war in Lebanon, who was among the rescued but Akkari, his girlfriend, and his little daughter. The Jyllands-Posten carried a telling photograph from the rescue operation with Akkari seen against the Danish flag gently wafting in the breeze--the very flag that he and his friends had caused to be burned all over the Middle East.

Predictably, Akkari found fault with the caliber of the Danish rescue mission. In the Extra Bladet, a Danish tabloid, he stated indignantly, "You should write about the horrible plane the Danish Foreign Ministry first wanted to send us home in. It was Jordanian and so old that it was life threatening."

In letters to the editor, Danes wondered the obvious: Why would a man who has so much to complain about want to return? They were also astounded by the number of Danish resident aliens found in Lebanon during the evacuation. There were calls to investigate how many were actually living in Lebanon while claiming unemployment benefits in Denmark. Predictably, the Danish liberal press deemed such questions crass and insensitive towards people who had been so massively traumatized by Israeli bombardments, but the issue will be debated in parliament in December.

Finally, the Danes have learned that Abu Bashar, a Syrian cleric living in the regional capital of Odense and working as a prison chaplain, has been fired after complaints from inmates at Nyborg State Prison that he was inciting hatred of Denmark, and after his statement in an article in the Fyens Stiftstidende that "Denmark is the next terror target."

Bashar's claim to fame stems from the cartoon crisis, when he showed a photograph of a man in a pig's mask on BBC television, and afterwards slipped it in among the material being presented by the touring imams in the Middle East, though it had nothing to do with the cartoons. It turned out to be a photo of a French comedian in a pig-calling contest. Bashar later claimed that he was misinterpreted and that the photo had been sent to him anonymously, showing how Muslims were insulted in Denmark. His forked tongue has severely damaged his credibility here.

To no one's surprise, Bashar claimed that his firing from his prison job was political. However, as a man who did not hold grudges, he was willing to forget the incident, if he could have his job back part-time, with disability pay. His knee was troubling him something awful. Sorry, no go.

The question remains why the Danish government puts up with these scoundrels and does not simply boot them out. France has rid itself of more than 20 extremist imams, as has Germany, while Spain and Italy each have deported four, and Holland three. Denmark so far has kicked none out. Surely, enough is enough.

I think its noteworthy that many Scandinavians actually found it to be rather funny that muslim rioters got killed by the mob in Afghanistan, Pakistan and Egpyt.... I think the muslims will bite their teeth out when they try to convert Scandinavia to Scandiarabia...

Fear of terrorism, which has seized Europe after the Sept. 11, Madrid and London attacks, has put more pressure on Muslims, who are now being treated as ?potential terrorists.? Following statements in Britain that more than 600 Muslims were being monitored, Germany announced that 32,000 German Muslims were under surveillance. Chair of the Bavaria Office for Protection of the Constitution, Wolfgang Weber stated that 32,000 out of 2,300,000 German Muslims were being monitored. Speaking at a panel in Munich, Weber, claiming that they were watching everybody who endangered the German democratic order, classified those who were monitored into three groups: 1) Those who wanted to establish an Islamic state based on Shariah law without resorting to violence, such as National Vision; 2) Those who collected donations for the violent groups, such as Hamas and Hezbollah; 3) Jihadist groups, such as al-Qaeda, and Ansar al-Islam. Weber asserted that Germany has become a venue where terrorists finalize their preparations. Weber, who also responded with hesitancy to the proposal to establish dialogue with Muslim associations, noted that dialogue attempts should be conducted with the utmost care. Hep Monatzeder, Deputy Chair of Munich Municipality on Relations with Muslim, criticized Weber?s isolationist approach. Noting that the intelligence reports were based on assumptions, not on evidence and facts, Monatzeder stated: ?The inclusion of the name of an association in those reports does not mean all of its members pose danger. Muslim associations carry out a wide range of activities; we are unable to isolate those who benefit from those. We should continue dialogue.? Speaking at the panel, Chair of Muslim Council Memduh Kapicibasi, who stressed that they felt offended by the connection made between Islam and terrorism, proposed the use of the notion ?religion-motivated violence.? Media exaggerates the danger Speaking to Zaman, Wolfgang Weber, Chair of the Bavaria Office for Protection of the Constitution, said that the terrorism threat had been exaggerated by the media. Noting that the point of view and the degree of exaggeration varied according to the channel and newspaper, Weber said they mostly focused on Islamic radicalism and extreme right wing groups, and further confessed that they had intelligence agents inside the Muslim associations. Number of Mosques Rising, Churches Declining A recently conducted research in Germany revealed that the number of mosques was increasing, while the number of churches was declining. According to the study by Central Islamic Archive Institute, the number of mosques has risen from 141 to 159 since 2004, while 128 were under construction. Likewise, the number of Muslims has increased from 56,000 to nearly one million since the early 1980s.

Sadly enough, anti-semitism is still strong in Europe, especailly among the lower classes and even more so in new EU partner countries like Poland. But there are signs of hope. One development I'm personally very proud of and looking forward to its further development, is the new synagogue, museum and jewish center in Munich:

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Jews Celebrate New Munich Synagogue

By MELISSA EDDY 11.09.06, 1:18 PM ET

Nearly 70 years after Adolf Hitler declared Munich's main synagogue an "eyesore" in the center of his power base and personally ordered it torn down, the city's Jews celebrated a return to the heart of the southern German city. On Thursday, the 68th anniversary of Kristallnacht, or the Night of Broken Glass, Torah scrolls were marched through the winding, cobblestone streets of downtown Munich to a newly built synagogue in the heart of the city. Hundreds of onlookers and 1,500 police officers stood by.

Charlotte Knobloch, president of Germany's main Jewish group and a Munich native who survived the night when synagogues and Jewish businesses across Germany were attacked, praised the new synagogue and community center as a statement that Jews survived and are thriving in Munich.

"It has always been my great wish to open the Ohel Jakob synagogue, Munich's new main synagogue, on Nov. 9," Knobloch said, before some 1,200 government and religious officials and others attending the dedication ceremony.

"Because today we can show the entire world that Hitler did not succeed in annihilating us. There are Jews in the former capital of the Nazi movement."

President Horst Koehler and some 1,200 other government and religious representatives were present for the dedication of the Ohel Jakob synagogue.

The completion of the synagogue and its accompanying community center is a milestone for this burgeoning Jewish community of 9,200 members - Germany's second-largest after Berlin's. It not only brings their house of worship, schools and community centers under the same roof, but places them back in the city center, close to the spires of city hall and the landmark Frauenkirche, or Church of Our Lady.

For many, that also means that the buildings are close to the heart of German consciousness.

"There are synagogues that have been rebuilt, synagogues that have been renovated, synagogues that have been reconstructed, but those are totally different from building a center from scratch for a growing Jewish community," said Rabbi Israel Singer of the World Jewish Congress. "That builds hope."

Koehler expressed the hope such a symbol would help make the Jewish community a normal part of German society again.

"The new Jewish Center, to which this synagogue belongs, not only fills a hole left open in the city center since World War II, it also helps to bridge the spiritual and cultural hole ripped open by the expulsion and murder of the Munich Jews," Koehler said.

When the U.S. Army marched into Munich in 1945, only several dozen Jews remained. While the immediate postwar years saw an influx of mostly Eastern European Jews, most of them were fleeing their homes and swiftly moved on to Israel or the United States.

Those who remained and slowly started to rebuild took up residence in the city's only remaining synagogue, located in the backyard of a far-flung neighborhood. Since then, the city has had no visible Jewish buildings.

"It's symbolic for more profound change in terms of the consciousness of the Jewish community which sees itself no longer sitting on packed bags, rather declaring that they are here to stay," said Michael Brenner, a professor of Jewish history at the University of Munich.

The new synagogue, which seats 550, is a cubic structure of travertine stone topped by a glass cube aimed at giving worshippers a view of the heavens. The interior walls are paneled with warm cedar decorated with golden psalms.

Funding for the synagogue, which cost about $72 million, came from the city of Munich, the state of Bavaria and Munich's Jewish community. It stands on St. Jakobs Square, only a few blocks from where the city's original main synagogue stood until its demise in June 1938.

In 2003, authorities thwarted a plot by a group of neo-Nazis to bomb the ceremony to lay the cornerstone for the new synagogue.

Security concerns led Jewish leaders to decide to house a memorial to the 4,000 Munich Jews killed in the Holocaust in an underground tunnel between the synagogue and the community center.

Such fears, say Singer, are behind criticism from some Holocaust survivors who argue a new synagogue should not be built in the city that was home to the Nazi party, where Joseph Goebbels gave the orders for Kristallnacht.

Yet, as the home to what the World Jewish Congress describes as the world's fastest-growing Jewish community, conservatively estimated at more than 100,000, Germany must ensure that the rights of its new immigrants are respected, he said.

"There should be squares in Germany that are secure under the sign of David, not only under the sign of the cross," Singer said.

Copyright 2006 Associated Press. All rights reserved. This material may not be published broadcast, rewritten, or redistributed

GEORGIA: The Georgian Parliament unanimously passed a declaration of the nation's desire to join NATO. During the vote, Parliament Speaker Nino Burdzhanadze said Georgia cannot be a neutral state. Georgian party leaders signed a declaration of national accord regarding NATO accession March 12.

stratfor.com===================

And, as a housekeeping matter, I bring this post from another thread of the same name here so as to be able to delete that other thread:

The Bundestag, the lower house of the German parliament, voted Thursday on the EU accession treaty of Bulgaria and Romania, ratifying their members by a 529-12-10 vote. Though a few remaining procedures still must be completed, such as formal approval by the Danish parliament and the European Commission, German parliamentary approval was the last serious obstacle standing between the two states and full EU membership. Everything else is detail.

The inclusion of Bulgaria and Romania in the European club will transform the fundamental character of the union -- more so than the addition of any other members to date -- and help to usher in its downfall as a political grouping.

EU accession, slated for Jan. 1, 2007, will be a highlight in the histories of both countries. Neither has lengthy institutional legacies: The two states emerged as powers only with the Ottoman defeats at the tail end of the 19th century, and then spent the bulk of the next 100 years enmeshed in wars or under Soviet domination. After the Cold War, they were the poorest members of the Warsaw Pact -- a distinction that will not change when they become Members No. 26 and 27 in the much more wealthy European Union. It would be a deliberate exercise in understatement to say that full access to EU markets, not to mention the inflow of structural development funds and agricultural subsidies, will radically transform them.

As for the European Union itself ?

First, the good news. With Bulgaria and Romania admitted, the Balkans will be permanently locked into Western structures -- no small feat, considering the 15 years of ethnic cleansing, war and chaos that wracked much of the region (and that Sofia and Bucharest wisely, and competently, avoided). With this accomplished, the union can digest the rest of that region at its leisure.

Also, despite the poverty of the incoming members, this round of expansion will not carry the sticker shock that the last one did. Bulgaria and Romania have less than 30 million people; the 2004 expansion took in 10 states with a total of nearly 90 million. There will be no collective gasp at the cost among the existing members -- they see this bill coming, and it is not nearly as large as the last one.

Finally, both Bulgaria and Romania border on the Black Sea, which previously was beyond the European Union's purview. Now European economic interests can do something they dearly love: They can seek out new markets -- Ukraine and the Caucasus come to mind -- for their goods.

But there also is a very dark side to this enlargement for the European Union as an institution. It is not that rule of law or judicial effectiveness are subpar in Bulgaria or Romania; it has nothing to do with the lack of integration for their large Roma populations; it is not connected to the states' reputations as smuggling havens. Nor does it involve declining relations with the Russians or the inevitability of the Turks wondering why they, too, cannot be admitted. Rather, it is the simple issue of voting weight.

Until recently, France and Germany were the center of gravity for the European Union -- imposing their collective will on the rest of the union and driving it forward from institutional growth spurt to growth spurt. With only six states in the union this was easy. With 15, it grew difficult, and at 25, it became downright thorny.

But in a union of 27, the fundamental math changes.

The European Union's decision-making mechanism is a system of qualified majority voting: Each state has a number of votes proportionate to its population. Or, to be more precise, a number that is roughly proportionate. As a sop to Europe's many small states, the larger states are given relatively fewer votes, while the smaller states have relatively more. In a union of 25, the French-German axis does not always have its way, but by voting together, Paris and Berlin carry sufficient weight to block any measures they truly oppose. But when relatively pro-U.S. and pro-free market Bulgaria and Romania are added to the mix, that calculus no longer holds. The broadly pro-U.S. and pro-free market states now will enjoy an absolute majority, and the other EU states combined will have the voting power to override a Franco-German veto.

That may sound rather innocuous, but it should always be remembered that France designed the European Union in order to further French political ambitions, and that Germany has always been the biggest economy in the mix and the anchor for Europe's common currency. Paris and Berlin are used to dominating policy of all types, not having it forced on them.

Small EU states have always had to suck it up and convince themselves that the benefits of union membership outweigh the drawbacks. Paris has never had to do that math. And if Paris has never had much of a problem biting its thumb at London or Washington, how will it react once Brussels makes a decision running counter to French interests -- and is able to make it stick?

The EU leadership has agreed to a draft energy plan that aims to kill the whole proverbial flock of birds with one stone. In theory, the policy will increase the use of renewable energy, decrease carbon emissions, diversify the use of biofuels and help Europe reduce its reliance on Russia by 2020. It is creative and ambitious -- and only the first step in Europe's new energy policy.

Analysis

Some detail-fudging by German President Angela Merkel, the current holder of the EU presidency and host of the ongoing EU heads-of-government summit, appears to have successfully paved the way to an EU-wide agreement on a bold new energy policy.

Under the terms of the deal, the European Union as a whole aims to reduce its carbon emissions by 20 percent, increase its use of renewable fuels to 20 percent of its total energy demand, use biofuels for 10 percent of transport demand, and most critically, reduce total EU energy demand by 20 percent. All of this is scheduled to take effect by 2020, and all is in addition to any progress that implementing Kyoto reductions has already achieved.

The reductions sound extremely sharp because they are, but Merkel has put forward a rather flexible method of attaining the goals. The binding targets will be achieved on an EU-wide basis rather than on a country-by-country basis, allowing richer states with more experience in renewable energy -- Denmark for example -- to shoulder more of the burden.

The biggest hang-up in the negotiations has been a desire by a few states -- led by France and Finland -- to classify nuclear power as an alternative fuel, a move staunchly opposed by non-nuclear states Ireland and Austria. Merkel's compromise was to blur in a new draft text between "alternative" and "low-emissions" technologies and insert fresh text that clearly makes a country's energy mix its own concern and not Brussels'. That move appears to have mitigated objections from both sides and paved the way to a formal agreement.

Other provisions would then be easily agreed upon, including one on pledging EU states to assist each other in maintaining security of supply, unity on negotiating with external energy suppliers and the development of an infrastructure to cushion Europe in the case of any supply shocks.

This document does far more than simply give Europe a green energy policy. The reduction of carbon emissions, the supply security, the increased alternative energy use and the overall reduction in energy demand clauses all serve a double purpose: political insurance. The Europeans, in particular the former Warsaw Pact states, fear the Russians are beginning to use energy exports to Europe as lever to gain influence over European policy. In essence, Russia is using its energy riches as a political tool. This essentially has led the Europeans to use the publicly attractive rhetoric of going green to achieve energy security.

Reducing total energy demand by a fifth -- and then mandating that at least a fifth of the remainder has to be from locally generated renewable sources as well as diversifying into low-carbon energy -- will take a huge bite out of European dependence on any particular petroleum supplier. Additionally, a network of infrastructure that can shuttle energy supplies back and forth across the union in case of disruption will be able to cope with disruptions resulting not just from acts of God, but also from acts of Moscow. Had such a system been in place in January 2006 or January 2007, Europe would not have felt the pinch of the Russian-Ukrainian natural gas tussle or the Russian-Belarusian oil spat.

The union can now get down to the nitty-gritty of two additional steps. The first is to diversify the sources of Europe's remaining petroleum imports. Austrian energy firm OMV is leading the charge at building a natural gas line from the Middle East, and France's Total is working to construct fresh facilities to import liquefied natural gas. This process will be costly and time-consuming, but for states like Poland that are a bit touchy about all things Russian, it will be a task eagerly attacked.

The second task will be the politically tricky one. Remember that the agreement will not spread the changes evenly across the union. It is up to the European Commission to propose -- by September -- specifically how to divide up the burden. Massaging away that little spoiler will require something a lot more creative than Merkel's technical blurring.

FRANCE: France is considering more fully participating in NATO, French Defense Minister Herve Morin said. France lacks influence in the military structure and misses opportunities to hold command positions because of its sideline status, Morin said. He also criticized France for appearing opposed to NATO's continuing evolution. NATO officials said they have not as yet held formal talks with France over full NATO re-entry.

LONDON — In a usual week, “Question Time” is a worthy but largely unexciting television production, a late-night panel discussion on the BBC that for 30 years has attracted a modest, pre-bedtime audience.

The police tried to keep back protesters on Thursday outside BBC offices in London before a TV appearance by the leader of the right-wing British National Party.

But on Thursday, it was transformed into the forum for Britain’s most widely anticipated political showdown in decades, drawing 8.2 million viewers, more than three times the program’s usual audience, on a par with the World Cup games played by England’s soccer team and more than the number of viewers for such weekly prime time hit shows as “Strictly Come Dancing.”

The occasion was the appearance on the program, the BBC’s flagship politics show, of Nick Griffin, leader of the British National Party, whose goal to “take back Britain” includes incentives that encourage the mass repatriation of Britain’s nonwhite immigrants, coupled with a deep hostility to Islam, which Mr. Griffin has described as “a wicked and vicious faith.” He has also spoken of his “repugnance” for lesbians and gay men, and advocated the end of civil contracts for same-sex relationships.

His record includes having denied the Holocaust, suggesting that some of the gas chambers at Auschwitz-Birkenau were built after World War II for the purposes of Jewish propaganda, and conceding, under questioning by a biographer, that Hitler, whom Mr. Griffin invoked in the past as a model, may have made mistakes. “Yes,” he said, according to the biographer, Dominic Carman, “Adolf went a bit too far.”

In June, the B.N.P. won two seats — one for Mr. Griffin — in Britain’s 72-seat contingent to the European Parliament, the first time it won election to anything higher than a local council. The party took more than a million votes, 6.2 percent of the total, and gained enough legitimacy, in the view of the BBC’s executives, to have its voice heard alongside the country’s mainstream parties on “Question Time.”

Mr. Griffin, 50, is a pinstripe-suit-and-tie-wearing Cambridge University law graduate whose mission is to put a mainstream gloss on a party that is the ideological descendant of the British Union of Fascists, the pro-Hitler “blackshirts” of the 1930s.

Since seizing the leadership of the British National Party a decade ago, Mr. Griffin, flak jacket concealed beneath his dark suit, has set out from his home in a heavily guarded farmhouse in Wales to change its members’ image, as a profile in Friday’s Daily Telegraph put it, “from skinheads in bomber jackets to ‘politically incorrect rebels.’ ”

For the B.N.P. and other parties, the timing of the TV debate was especially significant. It came barely seven months before the expected date for Britain’s general election in May. Soaring unemployment and immigration levels, as well as the threat of terrorism, are likely to be major issues then, and ones that could offer new openings to fringe parties like the B.N.P.

The BBC’s decision split Prime Minister Gordon Brown’s cabinet, as it did much of Britain. “If they are asked about their racist and bigoted views,” Mr. Brown said, “it will be a good opportunity to expose what they are about.” But his Welsh secretary, Peter Hain, vehemently disagreed. “The BBC should be ashamed of single-handedly doing a racist, fascist party the biggest favor in its grubby history,” he said.

As the TV taping approached on Thursday night, three hours before the debate was broadcast, a thousand protesters gathered outside the BBC’s Television Center in West London, setting off clashes with truncheon-wielding police officers. At one point, 30 protesters broke into the BBC’s lobby, before being pushed back. A handful of policemen and protesters were injured, and there were six arrests.

To reach the BBC studio, Mr. Griffin was ushered by a phalanx of bodyguards through a rear door of the TV center. For a while, it had looked as if the burly politician, once a boxer for the Cambridge team, might duck the occasion, citing the threat from the protesters — an outcome that would have fitted well with Mr. Griffin’s assertions that Britain’s “political class” will do everything it can to prevent the party’s message from gaining traction.

On Friday, Britain’s airwaves resonated with debate about who had won, and lost, in the 60-minute debate. The program’s format consists of five panelists taking questions from a studio audience of about 100 people and from the program’s presenter, David Dimbleby, a 71-year-old veteran of royal weddings and other state occasions who has achieved the status of a British Walter Cronkite with his middle-of-the-road manner and his custom on “Question Time” of ensuring that all points of view get a fair hearing.

The early reading by many of Britain’s major newspapers was that Mr. Griffin lost heavily on points. While he gained a mass audience for the first time, for a party that usually meets in cramped backstreet halls, he appeared shocked by the pounding he took from other panelists, by repeated booing in the studio and by infuriated interruptions from Mr. Dimbleby.

On Friday, Mr. Griffin said he would make a formal complaint to the BBC about “the venom” and “sheer unfairness” of the discussion. “That was a lynch mob,” he said.

============

Mr. Dimbleby led the charge. Quoting liberally from Mr. Griffin’s past remarks about the Holocaust, Islam, lesbians and gay men, as well as about restoring Britain to its “indigenous” white population, he demanded that Mr. Griffin say whether he stood by the remarks. After Mr. Griffin said he was “the most loathed man in Britain in the eyes of Britain’s Nazis,” the presenter interrupted brusquely: “Do you deny the Holocaust?”

The program drew 8.2 million viewers and angry questions in the studio about his party’s stances on race and the Holocaust.

When Mr. Griffin hesitated, he repeated the question. Mr. Griffin said that he had shifted from his earlier position of denial after listening to World War II radio intercepts of German plans for eliminating the Jews, but that he could not elaborate because of European laws that make Holocaust denial a criminal offense. Jack Straw, Britain’s justice minister and a fellow panelist, called Mr. Griffin “the Dr. Strangelove of British politics,” a “fantasizing conspiracy theorist.” He said, “You don’t need radio intercepts to know that people were gassed at Auschwitz.”

The B.N.P. leader also sought to mollify anger in the studio audience — many of whose members were Asian or black — at the party’s stance on saving Britain for whites, saying it was not a matter of color but of preserving the rights of Britain’s “indigenous peoples,” who he said could trace their origins back 17,000 years. “We are the aborigines here,” he said.

That brought one man in the audience to his feet. “Where do you want me to go?” asked Khush Klare, whose parents immigrated from India in the 1960s. “I love this country, I’m part of this country.”

The B.N.P. leader also said that to earn the right to remain in Britain, Muslims should “acknowledge that Britain always has been and must remain fundamentally a British and Christian country.” On lesbians and gay men, he said that “a lot of people in this country find the sight of two grown men kissing in public really creepy.” That brought to her feet a woman in the audience who said she was a lesbian. “I have to say the feeling of revulsion is mutual,” she said.

The EU and the IMF have come to an agreement with Ireland to provide Dublin with between €80 and €90 billion worth of loans. The bailout will be conditioned on Ireland pushing through a budget deficit reduction plan that will seek to bring the budget deficit under 3% of GDP as mandated by the Eurozone fiscal rules.

The terms of the bailout deal are still being revealed but what seems to be clear at this point is that the Irish low corporate tax rate will remain the same. At 12.5% the Irish corporate tax rate is one of the lowest in Europe and has really been the point of contention between Ireland and its larger EU member states. Countries like France have for long time focused on the Irish corporate tax rate in the argued that it gives Dublin an unfair competitive advantage over continental economies and that Ireland has been able to attract investors into Ireland with it’s low corporate rate. However behind this criticism is also a perception in Paris but also in Berlin that the low corporate tax rate has allowed Ireland to also be independent and to be independent-minded, however Dublin is fully funded until mid-2011 and therefore it felt that it was able to protect its corporate tax rate in the negotiations for the bailout right now, it felt it had an upper hand so to say.

What has happened now is that Germany seems to have withdrawn the corporate tax rate as one of the conditions for the bailout and has therefore allowed Ireland to keep it for the time being. Germany and France will take a wait-and-see approach with Ireland on this thorny issue and will wait for Ireland to slip up on the terms of its bailout bringing up the corporate tax rate perhaps at some later point in the future.

For Germany the bailout is another opportunity. First it allows Berlin to illustrates to the markets the effectiveness of the European Financial Stability Fund the EFSF which has about €440 billion plus the IMF money that brings it up to €750 billion. Now the fund was specifically designed to bail out Ireland, Portugal and Spain if the need arose. Now Ireland is falling down which means that Portugal could very will be next but the Portuguese needs would not be anymore to those of Ireland and Greece. And therefore the FSF has more than enough to handle both Ireland and Portugal however if Madrid also taps the EFSF the euro zone and Berlin may soon find themselves without any more ammunition in their clip to deal with further crises.

Ultimately Germany does not feel that the current crisis is one of existential nature. On one hand the uncertainty about the Eurozone and its’ markets means that the Euro is trading lower which helps German exports immensely. Furthermore Germany is using the opportunity of the crisis to redesign the European Union and its institutions and especially Eurozone fiscal rules and enforcement mechanisms of those rules. The real test for Eurozone therefore is not the panic level in Madrid or Lisbon or Dublin rather to what extent are the policymakers in Berlin concened.

I post this for the information in it. The conclusion in the title is author's opinion. I think he is concluding on the positive side that the Euro will be stronger once its weakest members die off. Impressive side note: Germany's growth rate was 3.6% in 2010. (Note to Obama, the recession is over.)

... This, now, is the position of the Club Med countries within the eurozone. The single currency is functioning so brilliantly, its vulnerable members are sliding towards bankruptcy. Frittering away their credibility in remorseless bond markets, they turn to Das Scheckbuch in Berlin for hard cash.

On current form, Greece will be paying nearly 10 per cent of its GDP in interest by 2015. Portugal’s 10-year borrowing costs are close to an unsustainable 7 per cent and would be even higher were it not for market manipulation by the European Central Bank. And Spain is sitting on 700,000 unsold homes, 20 per cent unemployment and a 33 per cent deterioration in competitiveness against Germany since the euro was formed.

Yes, the system is working a treat. No luck required, just more money. But from where will it come? The bail-out fund of 750 billion euros, cobbled together by the European Union and IMF, will not be enough. It may buy time, allowing Athens, Lisbon and Madrid to play the wheel for longer than they should, but their financial attrition grinds on.

Of the six eurozone countries that still have triple-A credit ratings – Austria, Finland, France, Germany, Luxembourg and the Netherlands – only one really matters: Germany. As the EU’s economic powerhouse (GDP growth was 3.6 per cent in 2010), it has become the lender of last resort. So far, Berlin has paid up, but 62 per cent of Germans now oppose further rescue packages for EU losers. Faced with choosing between Europe’s olive belt and her own electorate, Chancellor Angela Merkel will turn off the aid tap.

So what can be done? Some are calling for the issuance of an all-embracing euro bond, enabling the weaklings to access credit on terms similar to those enjoyed by more muscular neighbours. Last week, I asked Finland’s prime minister, Mari Kiviniemi, if this was a good idea. She responded in the way that an exasperated teacher might scold a classroom dunce: “No, it is a very bad idea”.

What about the ECB? Can it be relied upon to loosen monetary policy and allow rising inflation to ease the pain of the over-borrowed and inefficient? Not while Jean-Claude Trichet is in charge. The central bank piper is unmistakeably French, but the tune he plays is that of a Bavarian oompah band. Forget a cut in the ECB’s interest rate; it’s more likely to go up.

In short, there is no get-out-of-jail card. As the Bank of England’s governor explained this week, eurozone countries that binged on cheap money and self-indulgent pay awards must face up to improving competitiveness: “But because they are part of a monetary union and so do not have their own currency, they can do so only through outright falls in nominal wages. And to force that adjustment, unemployment has had to rise very sharply, compounding the impact on living standards.”

What, I suspect, Mervyn King believes, but dare not say, is that the excruciating realignment of income to output in the Club Med has much further to run. Greece has barely scratched the surface of a sprawling and corrupt public sector, where standards of book-keeping shame a country that lays claim to the oldest counting board yet discovered (300BC).

Greece is learning the hard way that cutting the budget deficit and reducing overall debt are not the same thing. There comes a point where austerity alone cannot deliver a solution, because the burden of unaffordable obligations is rising faster than savings can be made. Long after the bullet has been bitten, total mortgage arrears continue to deteriorate.

As long as Greece remains locked in a currency that is deutsche mark with only a hint of garlic, its economy cannot recover. A lethal combination of rising unemployment, falling wages and an exodus of talent will force it to confront reality. That will occur when either the voters decide they can no longer stand the hair shirt or the country’s creditors run of out patience.

The same will apply to Portugal and, eventually, Spain. Thus the euro, as we know it, is finished. Which is why… I’m a buyer of the euro. When the crunch comes – and the laggards secede or are expelled – the residue will be a group of solvent nations, unhindered by chronic budget and trade imbalances. As veteran investor Jim Rogers explains: “The more I look at it, the more I see Germany taking control of the euro.” That’ll do nicely.

At a Thursday meeting, the defense ministers of the Visegrad Group (V4) — a loose regional grouping of the Czech Republic, Hungary, Poland and Slovakia — decided to create a battle group. The decision is significant but expected. It’s significant because it shows that the V4 states are willing to upgrade their loose alliance to the security and military level. It’s expected because STRATFOR has long forecast that they would be forced to take security matters into their own hands by NATO’s lack of focus on the singular issue that concerns them: Russian resurgence in the post-Soviet sphere.

Europe’s two major political and security institutions are the European Union and NATO, both born in the aftermath of World War II, which devastated Europe. They then evolved in the shadow of a looming confrontation with the Soviet Union, which threatened to revisit such devastation. Approximating national interests to form a common security strategy was not perfect during the Cold War, but it was simple, especially with Soviet armored divisions poised for a strike at Western Europe via the North European Plain and the Fulda Gap.

“Poland could therefore be pivotal in any divergence of the blocs from the European core and hamper Moscow’s national security designs.”The Cold War and the memory of World War II acted as bookends holding European states on the metaphorical bookshelf. Once the two eroded in the 1990s, the books did not immediately come tumbling down. Instead, the drive to expand NATO and the European Union became an end to itself, giving both organizations a raison-d’etre in the 1990s. Inertia drove the entities.

But a number of factors since the mid-2000s has shaken this unity, primarily the emergence of an independent-minded Germany and the resurgence of Russia as a regional power. While Russia does not pose the same threat it did during the Cold War, Central Europeans continue to see Moscow as a security threat and would prefer for NATO to treat Russia accordingly. Germany sees Russia as a business opportunity and an exporter of cheap and clean energy. The two views collided most recently during discussions for NATO’s New Strategic Concept, producing a largely incomprehensible mission statement for the alliance. There are other tremors. The United States, the guarantor of European security structures, has spent the last 10 years obsessed with the Middle East and has been unable to prevent the divergence of interests on the European continent.

NATO has unsurprisingly become incapable of approximating national security interests toward a common mean, while the European Union has failed — spectacularly so in Libya — to create a coherent foreign policy. Instead, European countries are diverging into regionally focused groupings. The two most prominent of these are the Nordic states, which are cooperating closely with the Baltic states, and the V4. The blocs’ security concerns regarding Russian intentions are rooted in separate geographies. The Nordic and Baltic states’ focus is in the Baltic Sea region, while the V4 is concerned with Moscow’s strength in the traditional border states of Belarus, Ukraine and Moldova. The two regional blocs remind us of primordial continental plates splitting off from Pangea. Europe’s tectonic plates, held together for 60 years by geopolitical conditions, have begun to diverge.

Poland is key. It shares a Baltic Sea coast with Nordic neighbors to the north, of which it perceives Sweden as a strategic partner. But its historical roots are in the northern slopes of the Carpathians, a geographical feature it shares with the other V4 members. It also happens to be the United States’ most committed Central European ally as well as the region’s most populous country and most dynamic economy. Poland could therefore be pivotal in any divergence of the blocs from the European core and hamper Moscow’s national security designs.

The euro is becoming an ever greater threat to Europe's common future. The currency union chains together economies that are simply incompatible. Politicians approve one bailout package after the other and, in doing so, have set down a dangerous path that could burden Europeans for generations to come and set the EU back by decades. By SPIEGEL Staff

In the past 14 months, politicians in the euro-zone nations have adopted one bailout package after the next, convening for hectic summit meetings, wrangling over lazy compromises and building up risks of gigantic dimensions.

For just as long, they have been avoiding an important conclusion, namely that things cannot continue this way. The old euro no longer exists in its intended form, and the European Monetary Union isn't working. We need a Plan B.

Instead, those in responsible positions are getting bogged down in crisis management, as they seek to placate the public and sugarcoat the problems. They say that there is only a government debt crisis in a few euro countries but no euro crisis, citing as evidence the fact that the value of the European common currency has remained relatively stable against other currencies like the dollar.

But if it wasn't for the euro, Greece's debt crisis would be an isolated problem -- one that was tough for the country, but easy for Europe to bear. It is only because Greece is part of the euro zone that Athens' debts are a problem for all of its partners -- and pose a threat to the common currency.

If the rest of Europe abandons Greece, the crisis could spin out of control, spreading from one weak euro-zone country to the next. Investors would have no guarantees that Europe would not withdraw its support from Portugal or Ireland, if push came to shove, and they would sell their government bonds. The prices of these bonds would fall and risk premiums would go up. Then these countries would only be able to drum up fresh capital by paying high interest rates, which would only augment their existing budget problems. It's possible that they would no longer be able to raise any money at all, in which case they would become insolvent.

But if the current situation continues, the monetary union will invariably turn into a transfer union, a path the inventors of the euro were determined to prevent.

Democratic Deficiencies

The euro's founding fathers did not anticipate such a crisis, and thus did not include any provisions for it in the European Monetary Union's set of regulations. The euro welds together strong and weak countries, for better or for worse. There is no emergency exit, and there are no rules to follow in an emergency -- only the hope that everything will turn out well in the end. This is why the crises of a few euro countries are a crisis for the euro, as well as a crisis for the European Union, its governments and its institutions. And this is why the euro crisis has suddenly and expectedly mushroomed into a crisis for the political Project Europe, its future and its cohesion.

The fact that the countries funding the bailouts are lacking democratic legitimization is now becoming the greatest impediment to joint crisis management. Gone are the days of subtle debate over whether the European Parliament involves citizens in a just and proportional way in the decisions reached by the European Council, the body headed by the leaders of the European Union member states, and European Commission, the EU's executive. When things get serious, as they are now, decisions will no longer be made in the somewhat democratically legitimized EU bodies, but at the more or less secret meetings of a handful of leaders.

During the German chancellor's and the French president's quiet walks together, and at the behind-the-scenes meetings of discrete central banks, policies are being made that are then handed to the parliaments to rubber-stamp, even though hardly any of their members understand them.

The costly decisions that are ultimately reached by the luminaries of European solidarity don't just affect the citizens of the ailing member states in an existential way; they must also fear for their social security, their jobs and their assets.

The decisions of European politicians are just as troubling for citizens who live, like the Germans, on the sunny side of the union, and are worried that their country is running up debt that could remain on the books into a remotely distant future.

One of the reasons that Europeans are so incensed at their respective governments is that they are not involved in the decision-making process. Another is that they inevitably perceive their political leaders as being motivated by alleged factual constraints and the requirements of the financial markets, without having any plan of their own.

The euro debt crisis has already swept aside two governments, in Ireland and Portugal, and the Spanish and Greek governments could soon follow. Things are also getting precarious for the government in Berlin, where Chancellor Angela Merkel could lose her parliamentary majority in upcoming votes on bailout measures.

Resistance to Austerity Measures

A crack now bisects the continent, running between those countries that need more and more money and those that are expected to pay. With the Greeks frustrated over the Germans and the Germans over the Greeks, the Portuguese, the Spaniards and the Italians, the political peace project of European unity threatens to end in a great economic dispute among the nations.

In the debtor countries, there is growing resistance against the constant barrage of new austerity programs, while the people of the creditor countries are increasingly incensed over the billions in new aid. The "Outraged Citizens" are taking to the streets in Madrid and Athens while the " True Finns" gain strength in the parliament in Helsinki. Some 60 percent of Germans are opposed to a new aid package for Greece, and there is at least as much resistance among the opposition and trade unions in Athens to the government's efforts to rein in spending -- a precondition for additional loans.

Last Wednesday, thousands of Greeks staged a general strike intended to block access to the parliament building, where the new austerity program was being debated. Prime Minister Georgios Papandreou's limousine was showered with oranges, while rocks were thrown elsewhere. The police used tear gas to protect the elected representatives from the people they represent.

To secure payment of the next loan tranche under the European aid package, Papandreou intends to put together another austerity package worth more than €6.5 billion ($9.3 billion) by the end of the month. The protesters outside the parliament building, unwilling to accept the prime minister's course of action, shouted: "Thieves, traitors. What happened to our money?"

How long will citizens in the weak euro countries -- Greece, Portugal, Ireland and Spain -- continue to accept the harsh reforms? And how long will voters in the creditor countries tolerate their own governments taking ever-higher risks to rescue the euro?

Euro Has Become Greatest Threat to Continent's Future

Finland is a country that is often held up as a successful model for other European countries, but the success of the right-wing populist "True Finns," who captured 20 percent of the vote in April's parliamentary elections, came as a wakeup call to the political establishment in Brussels. As the skeptics gain ground throughout the EU, anti-European sentiments are growing in even the core countries of the union, like France and Germany.

The euro, created with the aim of permanently uniting Europe, has become the greatest threat to the continent's future. A collapse of the monetary union would set Europe back by decades, dealing it a blow from which it might never recover, especially with Europe's position already threatened by the fast-growing Asian economies. How is a fragmented Europe to prevail against this new competition?

This is why Europe's politicians want to defend the euro at all costs, and why they are approving one bailout package after the next. They are playing for time, hoping that the markets will settle down and the reforms will take hold.

The business community is supporting their efforts, too. In a major advertising campaign scheduled to run in leading publications this week, top German business executives, including ThyssenKrupp Chairman Gerhard Cromme, Siemens CEO Peter Löscher and Daimler CEO Dieter Zetsche, promote the monetary union and insist: "The euro is necessary." They argue that ailing member states must be assisted financially, and that the common currency is "absolutely worth this commitment."

The Euro Is a Fair-Weather Construct

But the causes of the euro crisis are more deep-seated than that. The monetary union is a fair-weather construct, as a number of economists said from the beginning. American economist Milton Friedman, for example, predicted that the euro would not survive its first major crisis, and later, in 2002, he added: "Euroland will collapse in five to 15 years."

For these reasons, the euro crisis, as suddenly as it occurred, was expected. However, the warnings had been ignored and treated as a minor nuisance. More than anything, the euro was a political project. Its advocates, most notably then German Chancellor Helmut Kohl and then French President François Mitterrand, wanted to permanently unite the continent's core countries and embed Germany, which many neighboring countries perceived as a threat following reunification, in the European community.

Politicians hoped that as a result of the common currency, the underlying problem of the euro's design would resolve itself, namely that the member states would almost automatically settle in at the same pace of economic development.

It was a deceptive hope. In fact, it was only interest rates that converged, now that the European Central Bank (ECB) was setting uniform rates for strong and weak members alike throughout the entire economic zone. As a result, a great deal of capital flowed to Spain and Ireland, where a real estate bubble developed, while the Greeks and the Portuguese were able to live shamelessly beyond their means. They imported more than they exported and took on more new debt to pay for their consumption.

This behavior continued unabated until the financial crisis put an end to it. Suddenly money was scarce. The bubbles in Ireland and Spain burst, the economy in the euro zone collapsed, and the Greeks were forced to admit that their debts were much higher than they had ever disclosed before -- and that they had falsified their numbers from the beginning and should, in fact, never have been allowed to join the monetary union in the first place.

Has the Euro Pushed Europe Apart?

Since then, the monetary union has been on the brink of collapse. Far from growing together economically, Europe has in fact grown even further apart. As a result, the chances that the euro will survive in its current form are slimmer than ever. Politicians who ignore the laws of economics cannot go unpunished in the long run.

If national currencies still existed, countries like Greece and Portugal could resort to a proven means of reducing their lack of competitiveness. They would simply have to devalue their drachma or their escudo, and then the laws of supply and demand would see to it that the flow of commodities was diverted.

The prices of Greek and Portuguese products would go down to make them more marketable abroad. At the same time, money would be worth less in Athens or Lisbon, so that residents of those countries could afford to buy fewer imported goods. This would be beneficial for the trade balance. Exports would rise and so would the foreign currency revenues, allowing the countries to service their debts more effectively. Not the government but the markets would reduce economic imbalances.

But in a monetary union, the exchange rate is no longer available as an adjustment valve. Instead, the member countries must regain their competitiveness in different ways, namely by imposing tough austerity measures and reducing wages and prices. In a monetary union, it is up to the governments to enforce what the exchange rate would do in a system of competing currencies.

Muddling Through

If this fails, the mountain of debt will continue to grow. In the end, a country with a large deficit has three options. First, it can declare itself insolvent and, after restructuring its debt, attempt to rebuild its economy. Second, it can also withdraw from the monetary union and reintroduce its national currency. Third, it can convince the creditor countries to keep issuing new loans, thereby providing it with permanent financing.

For more than a year now, European governments have been trying out a fourth option: muddling through.

And for just as long, politicians have been assuring the people that this approach is the alternative, and that it will end up costing taxpayers nothing at all, because the ailing countries will repay the debt, with interest and compound interest, once they've been bailed out. In fact, they argue, the whole thing is even a good business arrangement for the rescuers.

The truth is that governments and monetary watchdogs, despite all protestations to the contrary, have continually expanded their bailout programs, have built up massive risks that could significantly burden future generations and have violated both the European treaties and the iron-clad principles of the ECB.

To date, the history of the euro rescue program has not been a successful one. In fact, it is more of a history of mistakes and broken promises.

'There Will be No Budgetary Funds for Greece '

On March 1, 2010, Chancellor Merkel's spokeswoman said: "A clear no. There will be no budgetary funds for Greece." At that point, Athens was on the verge of bankruptcy, and politicians with Germany's center-right Christian Democratic Union (CDU) and pro-business Free Democratic Party (FDP) were suggesting that the country sell off a few islands.

On May 2, the euro countries and the International Monetary Fund (IMF) approved a €110 billion bailout package for the beleaguered country. Although the German portion of the loans was coming from the government-owned development bank KfW and not the budget, the federal government still served as guarantor. Every euro the Greeks do not repay will constitute a burden on the German taxpayer.

It was the first lapse, the first violation of the European treaties, which categorically rule out aid payments to needy euro countries. This so-called no-bailout clause was intended to guarantee that the monetary union didn't become a transfer union, and that the strong wouldn't have to pay for the weak. It was crucial to the acceptance of the treaty by the national parliaments; without it the German parliament, the Bundestag, would not have agreed to the monetary union.

The second lapse occurred soon afterwards. On May 9, 2010, the first euro bailout fund was launched. Although the volume of €440 billion alone made it clear that the opposite was the case, Merkel and Finance Minister Wolfgang Schäuble tried to downplay the importance of the European Financial Stability Fund (EFSF). They insisted that the fund was purely a precaution, would not be used and, most of all, was temporary.

"An extension of the current bailout funds will not happen on Germany's watch," Merkel said in Brussels on Sept. 16, 2010. This promise, too, lasted only a few months. On March 25, 2011, the leaders of the euro zone approved a new, constant crisis mechanism. Although it has a different name, the European Stability Mechanism (ESM), it will function on the basis of the same principle as its predecessor fund, the EFSF, beginning in mid-2013. The euro countries want to pry loose €700 billion for the fund, which will include a cash contribution for the first time. The Germans will be asked to pay at least €22 billion. To do so, Germany would have to take on additional debt.

'Outcome Is Very Close to a Transfer Union '

As if this weren't enough, in March the euro-zone member states also agreed that both the current bailout fund, the EFSF, and its successor, the ESM, would be authorized to buy government bonds from bankruptcy candidates with low credit ratings in the future. As a result, countries living beyond their means will no longer be punished with high interest rates, and market mechanisms will be eroded. Even the CDU's Michael Meister, one of the financial policy experts loyal to Merkel, says: "The outcome comes very close to a transfer union, which we reject."

All assurances aside, performance in return for Germany's willingness to play along would be absent again and again. Representatives of Merkel's government coalition government in Berlin have outdone each other in calling for strict penalties for countries that violate the euro-zone's deficit rules. There was talk of eliminating voting rights, of freezing EU subsidies like the bloated agriculture fund and, as a last-ditch solution, even of exclusion from the monetary union.

Most of all, however, the penalties were to be imposed automatically in the future when a country's budget deficit exceeded three percent of its gross domestic product. "We support the greatest amount of automatism possible," Merkel said in September 2010.

After taking a walk with French President Nicolas Sarkozy in the French seaside resort of Deauville, the chancellor abandoned the position that the deficit process was to be triggered automatically. Instead, the finance ministers in the euro zone must set it in motion first, meaning that any decision would be subject to the usual horsetrading in Brussels.

A Clear Market Reaction

The reaction by the markets to what is the biggest failure to date in the efforts to rescue the euro has been very clear. The yields for Greek and Irish government bonds rose, and Ireland sought protection from the bailout fund in November 2010, followed by Portugal in April 2011.

In recent months, the governments of the euro-zone countries have gradually expanded their bailout programs, and the risks for the German people and taxpayers have grown with each step.

There are already estimates of how much the Greek crisis will truly end up costing German taxpayers if the crisis drags on for years or a debt haircut becomes necessary. Economists Ansgar Belke of the University of Duisburg-Essen and Christian Dreger of Viadrina University in Frankfurt an der Oder estimate the cost at about €40 billion.

The Cologne Institute for Economic Research (IW) estimates the cost to German taxpayers at €65 billion if Portugal, Ireland and Spain also become insolvent. In the event of a complete collapse of the euro zone, Germany would be liable for all the guarantees and bailout aid it has provided.

And the potential costs for German taxpayers wouldn't stop there because they are also indirectly affected by the risks lurking in the accounts of the ECB and the state-controlled banks. Since May 2010, the ECB has spent €75 billion purchasing government bonds from ailing euro countries. Its goal was to bring calm to the markets and prevent the risk premiums for the bonds from skyrocketing. But many used the opportunity to unload the risky securities on the central bank.

The ECB is believed to have spent €40-50 billion to date on Greek government bonds. In addition, as of the end of April it had refinanced Greek banks to the tune of €90 billion.

Hardly anyone knows how high the risks are for the ECB. It has also accepted €480 billion in structured securities from the banks as collateral. The euro crisis has already turned into a threat to the ECB. German taxpayers bear 27 percent of the risk, which corresponds to the German Bundesbank's share of ECB capital.

Back at the Brink

Despite all of these bailout measures, and despite the risks that their rescuers have assumed, the weak euro countries are back where they were a little over a year ago, namely on the brink. The risk premiums on their government bonds have climbed to new record highs. The Greeks need fresh cash to avert bankruptcy, and the risk of the crisis spreading to other euro countries is far from averted.

The aid that euro countries and the IMF have provided to Greece so far is not enough. They had naïvely assumed that the crisis would end quickly. And they had seriously anticipated that the Greeks would return to the capital markets within the next two years, in order to raise about €60 billion on their own.

The money is missing because the Greek government, despite all of its reform efforts, is still not seen as creditworthy. This is why the funding gap needs to be closed, including with fresh money from the Europeans.

In return, the Greeks must fulfill even more stringent requirements. Given the Greek government crisis, achieving this seems more uncertain than ever. When the first bailout package of €110 billion was approved, Athens reacted with tough measures. Pensions were slashed, tobacco, petroleum and value-added taxes were drastically increased, and it was made easier for companies to lay workers off.

Nevertheless, Prime Minister Papandreou failed to meet the targets set by the so-called troika, consisting of the IMF, the ECB and the European Commission, the EU's executive arm. A maximum budget deficit of 8.1 percent of GDP had been stipulated for 2010, but in the end the deficit was 10.5 percent. After a "strong start" in the summer of 2010, the implementation of reforms has come to a "standstill in recent quarters," the troika concludes in its latest report. It also states that the gap between the planned and the actual deficit has once again "grown significantly" in recent months.

"There are many holy cows that were not slaughtered," explains Jens Bastian, an economist living in Athens. While more than 200,000 jobs were cut nationwide, many state-owned companies in particular are still seen as goldmines when it comes to sinecures.

In contrast to those privileged Greeks working in state-owned companies and government agencies, more and more people are now forced to live on small pensions or minimum-wage earnings of €750 to €800 a month, plus bonuses. Such incomes were hardly enough to live on in the past, and now they are to be reduced across the board or offset by drastic increases in the rate of tax on consumer goods.

Suffering and Sacrifices in Greece

"People don't know why they are suffering and making these sacrifices," says Athens political science professor Seraphim Seferiades. "The privilege of being in the euro zone is losing more and more of its value for people, because they benefit less and less from it." Almost 30 percent of Greeks would prefer to return to the drachma sooner rather than later.

Now the government will have to approve additional austerity measures if it is to obtain fresh cash from the EU and the IMF, in the form of a second aid package worth between €90 billion and €120 billion for the period until 2014. Greece will have to pay off old debts and make new ones. The government debt is currently about 150 percent of GDP and will likely rise to 160 percent soon.

How can such a weak country ever pay off such a huge debt? For once, almost all economists agree: It will be impossible without a debt restructuring involving creditors writing off large parts of their debts.

But a so-called haircut on Greek debt is not politically feasible at the moment. The financial markets are still too fragile, opponents argue, warning that it could trigger a new financial crisis like the one that followed the collapse of the US investment bank Lehman Brothers.

Germany Demands Private Investor Participation

But the Germans have been insisting that private sector creditors must also make a contribution to overcoming the crisis. Members of parliament with the governing parties -- the CDU, its Bavarian sister party the CSU, and the FDP -- recently made it clear to the government that they will reject another aid package in parliament if that doesn't happen. The chief budget expert with the CDU/CSU's parliamentary group, Norbert Barthle, urged his fellow members of parliament to act quickly. "If we wait much longer," he says, "there will hardly be any bonds left in the hands of private investors. Then taxpayers will end up shouldering the Greek bailout by themselves."

CSU Chairman Horst Seehofer agrees wholeheartedly. He is all too familiar with the constraints imposed by the general public in Germany, the majority of whom oppose a second bailout for Greece. "Experts have been telling me for a year that a restructuring of Greek debt is necessary," he says. "The time has come to start involving private lenders."

The German government recently came up with a proposal that would involve lenders in a relatively painless fashion: They would exchange their bonds for new securities with longer maturities. The contribution by the euro-zone countries would be reduced accordingly.

But with this demand, the Germans found themselves largely isolated. They were already viewed as troublemakers during the first Greek bailout, when they reluctantly yielded to the will of the majority and pressure from the ECB. Now, once again, they have been pressured from all sides to go along with the majority view.

That point was reached last Friday, when Merkel and Sarkozy agreed to a toothless compromise in Berlin. They agreed that private lenders should be involved in the new bailout package for Greece, but only on a voluntary basis -- a largely ineffective provision.

This solution is much too feeble for many German parliamentarians. "This is not the lender involvement that the Bundestag had demanded," says Frank Schäffler, a financial policy expert with the FDP. His CDU counterpart, Manfred Kolbe, even characterizes it as "fraudulent labeling," saying: "We need a debt haircut, and it won't happen voluntarily." CSU European expert Thomas Silberhorn calls for "binding regulations with the mandatory participation of private investors."

But from Sarkozy's standpoint, a tougher solution could jeopardize French banks. They are heavily exposed to Greek debt and could face serious difficulties.

German Banks, Insurers Unload Greek Bonds

German banks and insurance companies have systematically reduced their holdings of Greek government bonds. Since the beginning of 2010, they have reduced their total exposure from €34.8 billion to €17.3 billion, not including debt held by the state-owned development bank KfW. Insurance companies have reduced their investment in Greek bonds from €5.8 billion to only €2.8 billion in the last year.

In Germany, it is state-owned banks who have the greatest exposure to Greek debt. Commerzbank, a quarter of which is owned by the federal government, holds €2.9 billion in Greek bonds. The state-owned regional banks known as Landesbanken and their so-called bad banks hold additional risks of more than €4 billion.

The biggest dangers by far lurk on the books of FMS Wertmanagement, the bad bank for the nationalized mortgage lender Hypo Real Estate. It holds Greek government bonds and loans that constitute an economic risk of €10.8 billion. In the event of a debt restructuring, taxpayers would be hit hardest in Germany. A haircut would mean that FMS alone would need several billion in fresh equity capital.

ECB Considers Debt Crisis Greatest Risk To Banks

Now that the Germans and the French seem to be largely in agreement, they merely have to convince the ECB, the most determined opponent to date of the German proposal to require private sector involvement. The Frankfurt-based central bankers fear that this would trigger massive turmoil on the international money markets. In its new financial market stability report, the ECB categorizes the euro-zone sovereign debt crisis as the greatest risk to banks.

Most of all, the ECB doesn't want investors to be forced to write off part of their debt. The monetary watchdogs warn that the consequences would incalculable.

They argue that as soon as the powerful rating agencies gain the impression that the Greek government is not fulfilling its obligations without the complete consent of its creditors, they will have to downgrade its credit rating to D, the lowest level. The letter stands for "default." Even if the maturities of Greek bonds were extended with the consent of the lenders, they would have to be downgraded to a rating of SD, or "selective default."

Either way, under its statutes the ECB would no longer be allowed to accept such securities as collateral in returning for providing liquidity to banks. The consequences would be catastrophic. Greek banks would be largely cut off from the European money cycle and would thus run the risk of becoming illiquid. The Greek banking system would find itself on the brink of collapse.

Paving the Path to Euro Bonds

This is precisely where a compromise proposal that Finance Minister Schäuble plans to present to the ECB and to his counterparts from the euro-zone countries comes in. Under the proposal, if Greek bonds are no longer accepted as collateral following the participation of private lenders, the ECB will simply have to be offered bonds that satisfy its requirements.

A 10-member "Greece Task Force" at the German Finance Ministry has worked out how this could function. The experts propose that the Greek government, in addition to the €90 billion-€120 billion in fresh cash it may receive from the euro-zone countries and the IMF as part of a second bailout, also be given access to bonds issued by the EFSF, the euro rescue fund. It could pass on these securities, which have the rating agencies' highest rating of AAA, to Greek banks, which in turn could use them as collateral to obtain liquidity from the ECB.

The problem is that this measure would make the new bailout package significantly more expensive. To ensure that the EFSF had sufficient funds for the operation, its financial scope would have to be increased so that it could really make €440 billion available, as it was originally intended to do. To achieve this, the member states would have to double the scope of their respective guarantees. Germany, for example, would be liable for €246 billion in the future, instead of the current €123 billion.

The would-be euro rescuers are also considering accessing the so-called Hellenic Financial Stability Fund. This fund, set up as part of the first Greek bailout package in May 2010, contains €10 billion, which could be used to boost the capital of Greek banks in an emergency. The fund hasn't been touched yet.

Berlin Expecting the Worst

The details of the new bailout plan are to be worked out by July. This is absolutely necessary, because if the next tranche of aid is not paid by mid-July, Greece will be bankrupt.

Despite all of these hiccups, the money will flow to the Greeks. But no one, including the German government, believes that this will solve the problems in the euro zone. After more than a year of uninterrupted attempts at fighting the crisis, officials in Berlin are expecting the worst and intend to be ready just in case.

For this reason, Schäuble's crisis team has been instructed to review all possible scenarios. For example, what happens if a country can no longer meet its payment obligations or if a member leaves the monetary union? And how can imbalances in a common currency zone be averted?

There are essentially two alternatives. The first is a radical one, in which the governments pull the plug and leave the beleaguered countries to fend for themselves. The second, more pragmatic solution is to continue muddling along, though somewhat more efficiently, and to hope that things improve. Neither option will be cheap.

The radical cure works like this: Disappointed by the lack of progress and prospects for improvement, the euro-zone countries leave Greece to fend for itself. They refuse to throw even more money at Athens after all the money they have already spent.

The country would quickly become insolvent, because it would no longer be able to borrow any money on the markets. Because Greek lenders still shoulder a substantial portion of the government debt, the country's banking sector could see a number of bankruptcies.

This approach also carries with it the threat of contagion. If Greece slides into uncontrolled bankruptcy, investors might refuse to invest their money in other ailing euro-zone members. Even more banks could collapse in the ensuing chain reaction.

The Nuclear Option

In light of these incalculable developments, many are now considering the nuclear option as a real alternative: Greece withdraws from the monetary union and reintroduces the drachma. The government in Athens was already toying with the idea weeks ago, and now even internationally respected economists are recommending it. "A withdrawal from the euro would be the lesser of two evils," says Hans-Werner Sinn, head of the respected Munich-based Ifo Institute for Economic Research.

Nouriel Roubini, an economist at New York University, also supports the idea. The renowned professor argues Greece's only chance is to devalue its own currency and thus improve its competitiveness. Roubini was one of the few to predict the financial crisis three years ago.

In every financial crisis to date, it has taken a devaluation of the currency to reinvigorate the economy of a crisis-stricken country, Roubini argues. But historic examples can only be applied to the conditions in a monetary union to a limited extent.

The crisis would not end after Greece's withdrawal. In fact, it could even get worse. The country's debts would still be denominated in euros, which would turn them into foreign-currency debts overnight. Their value in the new national currency would rise rapidly, because the drachma would be devalued. Greek borrowers would be all but unable to meet their obligations.

Banks, in turn, would come under pressure, both in Greece and in the rest of the euro zone. And costly bailout measures for the banking industry would be needed once again.

At the end of such a development, the monetary union could disintegrate into a hard-currency bloc and a group with its own, weaker currencies. Critics of the common currency, like former Bundesbank board member Wilhelm Nölling, favor such a solution. Nölling and a group of like-minded people once filed and lost a suit against the introduction of the euro before Germany's Federal Constitutional Court, and now he is suing the government once against over the euro bailout fund. The court's decision is still pending.

The alternative to the breakup of the monetary union is hardly any less threatening, leading as it does directly to a transfer union. After a year of Greek bailouts, the beginning is already underway, and starting in 2013 the planned permanent bailout fund, the ESM, (which EU finance ministers approved on Monday) will be yet another step on this dangerous path.

Echoes of Italy's Mezzogiorno and Belgium's Wallonia

The end result could look something like this: The deficit countries would require permanent financing from the more stable north. What was treated as a loan in the past would be transformed into a subsidy, and thus requiring neither interest nor repayment. The monetary union would become a financial union and the debtor countries the permanent recipients of subsidies, dependent on contributions from their economically more powerful neighbors -- much like the Mezzogiorno in Italy or Belgium's Wallonia region.

To prevent this from happening, many politicians specializing in financial and economic affairs recommend bringing about the political union of Europe as quickly as possible, a union with a strong central government. They argue that if the nations in the euro zone formed a closer union, they could coordinate their financial systems more effectively, thus providing the common currency with a political foundation.

This would make it easier to implement reforms in the recipient countries and improve their competitiveness. Just recently, ECB President Jean-Claude Trichet proposed installing a European finance ministry equipped with the right to intervene in the individual member states.

A Cautionary Tale in German Reunification

But it isn't quite that easy. More integration doesn't necessarily mean that economic imbalances would disappear as a result. No one understands this better than the Germans, who had similar experiences with the monetary union between the two Germanys about 20 years ago. Effective July 1, 1990, the deutschmark became the official currency of East Germany. It was largely exchanged for the former East German mark at a ratio of one-to-one. The East German states joined the Federal Republic of Germany only three months later. It was the model case of a monetary union that was accompanied by a political union.

But anyone who believed that rapid unification would lessen the economic shock of the monetary union between the two Germanys was soon disappointed. In fact, the economic imbalances in reunified Germany became entrenched after that. Thousands of companies in the former East Germany went out of business, because they were unable to bring productivity up to Western standards.

The unemployment figures exploded, and financial transfers between the two parts of the country soon exceeded the trillion mark. To this day, the former East German states still lag behind the former West German states in terms of economic strength, productivity and income.

German reunification did nothing to change this. It merely helped to financially cushion the negative consequences of the monetary union. The states of the former East Germany were incorporated into the West German inter-state fiscal adjustment system (under which money is transferred from richer to poorer states) under favorable terms, and the former East Germans were suddenly given access to the blessings of the generous West German social system.

The lesson is clear: German unification is not a valid role model for European politicians, but rather a cautionary tale. It shows how quickly a poorly designed monetary union can lead to a permanent transfer union.

Such a model would in any case be incompatible with the European treaties. New agreements would have to be negotiated and ratified by all national parliaments, and perhaps even approved in referendums.

But perhaps the people of Europe and their representatives will decide the fate of the monetary union first. It could happen in Athens or in Lisbon, if the necessary reforms fail as a result of popular protests. Or in Berlin -- should the billions in loan guarantees actually come due.

There has been a fight between the advocates of two different ideals from the beginning of the European Union. Which stance it should adopt: the classical liberal vision, or the socialist vision of Europe? The introduction of the Euro has played a key role in the strategies of these two visions. In order to understand the tragedy of the Euro and its history, it is important to be familiar with these two diverging, and underlying visions and tensions that have come to the fore in the face of a single currency

THE CLASSICAL LIBERAL VISION

The founding fathers of the EU, Schuman (France [born in Luxembourg]), Adenauer (Germany), and Alcide de Gasperi (Italy), all German speaking Catholics, were followers of the classical liberal vision of Europe. They were also Christian democrats. The classical liberal vision regards individual liberty as the most important cultural value of Europeans and Christianity. In this vision sovereign European states defend private property rights and a free market economy in a Europe of open borders, thus enabling the free exchange of goods, services and ideas.

The Treaty of Rome in 1957 was the main achievement toward the classical liberal vision for Europe. The Treaty delivered four basic liberties: free circulation of goods, free offering of services, free movement of financial capital, and free migration. The Treaty restored rights that had been essential for Europe during the classical liberal period in the nineteenth century, but had been abandoned in the age of nationalism and socialism. The Treaty was a turning away from the age of socialism that had led to conflicts between European nations, culminating in two world wars.

The classical liberal vision aims at a restoration of nineteenth century freedoms. Free competition without entry barriers should prevail in a common European market. In this vision, no one could prohibit a German hairdresser from cutting hair in Spain, and no one could tax an English man for transferring money from a German to a French bank, or for investing in the Italian stock market. No one could prevent, through regulations, a French brewer from selling beer in Germany. No government could give subsidies distorting competition. No one could prevent a Dane from running away from his welfare state and extreme high tax rates, and migrating to a state with a lower tax burden, such as Ireland.

In order to accomplish this ideal of peaceful cooperation and flourishing exchanges, nothing more than freedom would be necessary. In this vision there would be no need to create a European superstate. In fact, the classical liberal vision is highly skeptical of a central European state; it is considered detrimental to individual liberty. Philosophically speaking, many defenders of this vision are inspired by Catholicism, and borders of the European community are defined by Christianity. In line with Catholic social teaching, a principle of subsidiarity should prevail: problems should be solved at the lowest and least concentrated level possible. The only centralized European institution acceptable would be a European Court of Justice, its activities restricted to supervising conflicts between member states, and guaranteeing the four basic liberties.

From the classical liberal point of view, there should be many competing political systems, as has been the case in Europe for centuries. In the Middle Ages, and until the nineteenth century, there existed very different political systems, such as independent cities of Flanders, Germany and Northern Italy. There were Kingdoms such as Bavaria or Saxony, and there were Republics such as Venice. Political diversity was demonstrated most clearly in the strongly decentralized Germany. Under a culture of diversity and pluralism, science and industry flourished.

Competition on all levels is essential to the classical liberal vision. It leads to coherence, as product standards, factor prices, and especially wage rates tend to converge. Capital moves where wages are low, bidding them up; workers, on the other hand move where wage rates are high, bidding them down. Markets offer decentralized solutions for environmental problems based on private property. Political competition ensures the most important European value: liberty.Tax competition fosters lower tax rates and fiscal responsibility. People vote by foot, evading excessive tax rates, as do companies. Different national tax sovereignties are seen as the best protection against tyranny.Competition also prevails in the field of money. Different monetary authorities compete in offering currencies of high quality. Authorities offering more stable currencies exert pressure on other authorities to follow suit.

THE SOCIALIST VISION

In direct opposition to the classical liberal vision is the socialist or Empire vision of Europe, defended by politicians such as Jacques Delors or François Mitterand. A coalition of statist interests of the nationalist, socialist, and conservative ilk does what it can do to advance its agenda. It wants to see the European Union as an empire or a fortress: protectionist to the outside and interventionist on the inside. These statists dream of a centralized state with efficient technocrats—as the ruling technocrat statists imagine themselves to be—managing it.

In this ideal, the center of the Empire would rule over the periphery. There would be common and centralized legislation. The defenders of the socialist vision of Europe want to erect a European mega state reproducing the nation states on the European level. They want a European welfare state that would provide for redistribution, regulation, and harmonization of legislation within Europe. The harmonization of taxes and social regulations would be carried out at the highest level. If the VAT is between fifteen and twenty-five percent in the European Union, socialists would harmonize it to twenty-five percent in all countries. Such harmonization of social regulation is in the interest of the most protected, the richest and the most productive workers, who can “afford” such regulation—while their peers cannot. If German social regulations were applied to the Poles, for instance, the latter would have problems competing with the former.

The agenda of the socialist vision is to grant ever more power to the central state, i.e., to Brussels. The socialist vision for Europe is the ideal of the political class, the bureaucrats, the interest groups, the privileged, and the subsidized sectors who want to create a powerful central state for their own enrichment. Adherents to this view present a European state as a necessity, and consider it only a question of time.

Along the socialist path, the European central state would one day become so powerful that the sovereign states would become subservient to them. (We can already see first indicators of such subservience in the case of Greece. Greece behaves like a protectorate of Brussels, who tells its government how to handle its deficit.)

The socialist vision provides no obvious geographical limits for the European state—in contrast to the Catholic-inspired classical liberal vision. Political competition is seen as an obstacle to the central state, which removes itself from public control. In this sense the central state in the socialist vision becomes less and less democratic as power is shifted to bureaucrats and technocrats. (An example is provided by the European Commission, the executive body of the European Union. The Commissioners are not elected but appointed by the member state governments.)

Historically, precedents for this old socialist plan of founding a controlling central state in Europe were established by Charlemagne, Napoleon, Stalin and Hitler. The difference is, however, that this time no direct military means would be necessary. But state power coercion is used in the push for a central European state.

From a tactical perspective, crisis situations in particular would be used by the adherents of the socialist vision to create new institutions (such as the European Central Bank (ECB) or possibly, in the future, a European Ministry of Finance), as well as to extend the powers of existing institutions such as the European Commission or the ECB.

The classical liberal and the socialist visions of Europe are, consequently, irreconcilable. In fact, the increase in power of a central state as proposed by the socialist vision implies a reduction of the four basic liberties, and most certainly less individual liberty.

THE HISTORY OF A STRUGGLE BETWEEN TWO VISIONS

The two visions have been struggling with each other since the 1950s. In the beginning, the design for the European Communities adhered more closely to the classical liberal vision.6 The European Community consisted of sovereign states and guaranteed the four basic liberties. From the point of view of the classical liberals, a main birth defect of the community was the subsidy and intervention in agricultural policy. Also, by construction, the only legislative initiative belongs to the European Commission. Once the Commission has made a proposal for legislation, the Council of the European Union alone, or together with the European Parliament, may approve the proposal.7 This setup contains the seed of centralization.

Consequently, the institutional setup, from the very beginning, was designed to accommodate centralization and dictatorship over minority opinions, as unanimity is not required for all decisions and the areas where unanimity rule is required have been reduced over the years.

The classical liberal model is defended traditionally by Christian democrats and states such as the Netherlands, Germany, and also Great Britain. But social democrats and socialists, usually led by the French government, defend the Empire version of Europe. In fact, in light of its rapid fall in 1940, the years of Nazi occupation, its failures in Indochina, and the loss of its African colonies, the French ruling class used the European Community to regain its influence and pride, and to compensate for the loss of its empire.

Over the years there has been a slow tendency toward the socialist ideal—with increasing budgets for the EU and a new regional policy that effectively redistributes wealth across Europe.10 Countless regulations and harmonization have pushed in that direction as well.

The classical liberal vision of sovereign and independent states did appear to be given new strength by the collapse of the Soviet Union and the reunification of Germany. First, Germany, having traditionally defended this vision, became stronger due to the reunification. Second, the new states emerging from the ashes of communism, such as Czechoslovakia (Václav Klaus), Poland, Hungary, etc., also supported the classical liberal vision for Europe. These new states wanted to enjoy their new, recently won liberty. They had had enough of socialism, Empires, and centralization.

The influence of the French government was now reduced.11 The socialist camp saw its defeat coming. A fast enlargement of the EU incorporating the new states in the East had to be prevented. A step forward toward a central state had to be taken. The single currency was to be the vehicle to achieve this aim.12 According to the German newspapers, the French government feared that Germany, after its reunification, would create “a DM dominated free trade area from Brest to Brest-Litowsk”.13 European (French) socialists needed power over the monetary unit urgently.

As Charles Gave14 argued on the events following the fall of the Berlin Wall:

For the proponents of the “Roman Empire” [socialist vision], the European State had to be organized immediately, whatever the risks, and become inevitable. Otherwise, the proponents of “Christian Europe” [classical liberal vision] would win by default and history would likely never reverse its course. The collapse of the Soviet Union was the crisis which gave the opportunity, and drive, to the Roman Empire to push through an overly ambitious program. The scale had been tipped and the “Roman Empire” needed to tip it the other way; and the creation of the Euro, more than anything, came to symbolize the push by the Roman camp towards a centralized super-structure.

The official line of argument for the defenders of a single fiat currency was that the Euro would lower transactions costs—facilitating trade, tourism and growth in Europe. More implicitly, however, the single currency was seen as a first step toward the creation of a European state. It was assumed that the Euro would create pressure to introduce this state.

The real reason the German government, traditionally opposed to the socialist vision, finally accepted the Euro, had to do with German reunification. The deal was as follows: France builds its European empire and Germany gets its reunification.15 It was maintained that Germany would otherwise become too powerful and its sharpest weapon, the Deutschmark, had to be taken away—in other words, disarmament.

The next step in the plan of the socialist camp was the draft of a European constitution (by French ex-President Valery Giscard d’Estaing Ginard), establishing a central state. But the constitution project failed utterly; it was voted down by voters in France and the Netherlands in 2005. As is often the case, Germans had not even been asked. They had not been asked on the question of the Euro either. But politicians usually do not give up until they get what they want. In this case they just renamed the constitution; and it no longer required a popular vote in many countries.

As a consequence, the Lisbon Treaty was passed in December 2007. The Treaty is full of words like pluralism, non-discrimination, tolerance and solidarity, all of which can be interpreted as calls to infringe upon private property rights and the freedom of contract. In Article Three, the European Union pledges to fight social exclusion and discrimination, thereby opening the doors to interventionists. God is not mentioned once in the Lisbon Treaty.

In actuality, the Lisbon Treaty constitutes a defeat for the socialist ideal. It is not a genuine constitution but merely a treaty. It is a dead end for Empire advocates, who were forced to regroup and focus on the one tool that they had left—the Euro. But how, exactly, does it provoke a centralization in Europe?

The Euro causes the kinds of problems which can be viewed as a pretext for centralization on the part of politicians. Indeed, the construction and setup of the Euro have themselves provoked a chain of severe crises: member states can use the printing press to finance their deficits; this feature of the EMU invariably leads to a sovereign debt crisis. The crisis, in turn, may be used to centralize power and fiscal policies. The centralization of fiscal policies may then be used to harmonize taxation and get rid of tax competition.

In the current sovereign debt crisis, the Euro, the only means left for the socialists to strengthen their case and achieve their central state, is at stake. It is, therefore, far from the truth that the end of the Euro would mean the end of Europe or the European idea; it would be just the end of the socialist version of it.

Naturally one can have an economically integrated Europe with its four basic liberties without a single fiat currency. The UK, Sweden, Denmark, and the Czech Republic do not have the Euro, but belong to the common market enjoying the four liberties. If Greece were to join these countries, the classical liberal vision would remain untouched. In fact, a free choice of currency is more akin to the European value of liberty than a European legal tender coming along with a monopolistic money producer.

Europe continues to be engulfed by economic crisis. The global focus returns to Athens on June 28 as Greek parliamentarians debate austerity measures imposed on them by eurozone partners. If the Greeks vote down these measures, Athens will not receive its second bailout, which could create an even worse crisis in Europe and the world.

It is important to understand that the crisis is not fundamentally about Greece or even about the indebtedness of the entire currency bloc. After all, Greece represents only 2.5 percent of the eurozone’s gross domestic product (GDP), and the bloc’s fiscal numbers are not that bad when looked at in the aggregate. Its overall deficit and debt figures are in a better shape than those of the United States — the U.S. budget deficit stood at 10.6 percent of GDP in 2010, compared to 6.4 percent for the European Union — yet the focus continues to be on Europe.

That is because the real crisis is the more fundamental question of how the European continent is to be ruled in the 21st century. Europe has emerged from its subservience during the Cold War, when it was the geopolitical chessboard for the Soviet Union and the United States. It won its independence by default as the superpowers retreated: Russia withdrawing to its Soviet sphere of influence and the United States switching its focus to the Middle East after 9/11. Since the 1990s, Europe has dabbled with institutional reform but has left the fundamental question of political integration off the table, even as it integrated economically. This is ultimately the source of the current sovereign debt crisis, the lack of political oversight over economic integration gone wrong.

The eurozone’s economic crisis brought this question of Europe’s political fate into focus, but it is a recurring issue. Roughly every 100 years, Europe confronts this dilemma. The Continent suffers from overpopulation — of nations, not people. Europe has the largest concentration of independent nation-states per square foot than any other continent. While Africa is larger and has more countries, no continent has as many rich and relatively powerful countries as Europe does. This is because, geographically, the Continent is riddled with features that prevent the formation of a single political entity. Mountain ranges, peninsulas and islands limit the ability of large powers to dominate or conquer the smaller ones. No single river forms a unifying river valley that can dominate the rest of the Continent. The Danube comes close, but it drains into the practically landlocked Black Sea, the only exit from which is another practically landlocked sea, the Mediterranean. This limits Europe’s ability to produce an independent entity capable of global power projection.

However, Europe does have plenty of rivers, convenient transportation routes and well-sheltered harbors. This allows for capital generation at a number of points on the Continent, such as Vienna, Paris, London, Frankfurt, Rotterdam, Milan, Turin and Hamburg. Thus, while large armies have trouble physically pushing through the Continent and subverting various nations under one rule, ideas, capital, goods and services do not. This makes Europe rich (the Continent has at least the equivalent GDP of the United States, and it could be larger depending how one calculates it).

What makes Europe rich, however, also makes it fragmented. The current political and security architectures of Europe — the EU and NATO — were encouraged by the United States in order to unify the Continent so that it could present a somewhat united front against the Soviet Union. They did not grow organically out of the Continent. This is a problem because Moscow is no longer a threat for all European countries, Germany and France see Russia as a business partner and European states are facing their first true challenge to Continental governance, with fragmentation and suspicion returning in full force. Closer unification and the creation of some sort of United States of Europe seems like the obvious solution to the problems posed by the eurozone sovereign debt crisis — although the eurozone’s problems are many and not easily solved just by integration, and Europe’s geography and history favor fragmentation.

Confederation of Europe

The European Union is a confederation of states that outsources day-to-day management of many policy spheres to a bureaucratic arm (the European Commission) and monetary policy to the European Central Bank. The important policy issues, such as defense, foreign policy and taxation, remain the sole prerogatives of the states. The states still meet in various formats to deal with these problems. Solutions to the Greek, Irish and Portuguese fiscal problems are agreed upon by all eurozone states on an ad hoc basis, as is participation in the Libyan military campaign within the context of the European Union. Every important decision requires that the states meet and reach a mutually acceptable solution, often producing non-optimal outcomes that are products of compromise.

The best analogy for the contemporary European Union is found not in European history but in American history. This is the period between the successful Revolutionary War in 1783 and the ratification of the U.S. Constitution in 1788. Within that five-year period, the United States was governed by a set of laws drawn up in the Articles of the Confederation. The country had no executive, no government, no real army and no foreign policy. States retained their own armies and many had minor coastal navies. They conducted foreign and trade policy independent of the wishes of the Continental Congress, a supranational body that had less power than even the European Parliament of today (this despite Article VI of the Articles of Confederation, which stipulated that states would not be able to conduct independent foreign policy without the consent of Congress). Congress was supposed to raise funds from the states to fund such things as a Continental Army, pay benefits to the veterans of the Revolutionary War and pay back loans that European powers gave Americans during the war against the British. States, however, refused to give Congress money, and there was nothing anybody could do about it. Congress was forced to print money, causing the Confederation’s currency to become worthless.

With such a loose confederation set-up, the costs of the Revolutionary War were ultimately unbearable for the fledgling nation. The reality of the international system, which pitted the new nation against aggressive European powers looking to subvert America’s independence, soon engulfed the ideals of states’ independence and limited government. Social, economic and security burdens proved too great for individual states to contain and a powerless Congress to address.

Nothing brought this reality home more than a rebellion in Western Massachusetts led by Daniel Shays in 1787. Shays’ Rebellion was, at its heart, an economic crisis. Burdened by European lenders calling for repayment of America’s war debt, the states’ economies collapsed and with them the livelihoods of many rural farmers, many of whom were veterans of the Revolutionary War who had been promised benefits. Austerity measures — often in the form of land confiscation — were imposed on the rural poor to pay off the European creditors. Shays’ Rebellion was put down without the help of the Continental Congress essentially by a local Massachusetts militia acting without any real federal oversight. The rebellion was defeated, but America’s impotence was apparent for all to see, both foreign and domestic.

An economic crisis, domestic insecurity and constant fear of a British counterattack — Britain had not demobilized forts it held on the U.S. side of the Great Lakes — impressed upon the independent-minded states that a “more perfect union” was necessary. Thus the United States of America, as we know it today, was formed. States gave up their rights to conduct foreign policy, to set trade policies independent of each other and to withhold funds from the federal government. The United States set up an executive branch with powers to wage war and conduct foreign policy, as well as a legislature that could no longer be ignored. In 1794, the government’s response to the so-called Whiskey Rebellion in western Pennsylvania showed the strength of the federal arrangement, in stark contrast to the Continental Congress’ handling of Shays’ Rebellion. Washington dispatched an army of more than 10,000 men to suppress a few hundred distillers refusing to pay a new whiskey tax to fund the national debt, thereby sending a clear message of the new government’s overwhelming fiscal, political and military power.

When examining the evolution of the American Confederation into the United States of America, one can find many parallels with the European Union, among others a weak center, independent states, economic crisis and over-indebtedness. The most substantial difference between the United States in the late 18th century and Europe in the 21st century is the level of external threat. In 1787, Shays’ Rebellion impressed upon many Americans — particularly George Washington, who was irked by the crisis — just how weak the country was. If a band of farmers could threaten one of the strongest states in the union, what would the British forces still garrisoned on American soil and in Quebec to the north be able to do? States could independently muddle through the economic crisis, but they could not prevent a British counterattack or protect their merchant fleet against Barbary pirates. America could not survive another such mishap and such a wanton display of military and political impotence.

To America’s advantage, the states all shared similar geography as well as similar culture and language. Although they had different economic policies and interests, all of them ultimately depended upon seaborne Atlantic trade. The threat that such trade would be choked off by a superior naval force — or even by North African pirates — was a clear and present danger. The threat of British counterattack from the north may not have been an existential threat to the southern states, but they realized that if New York, Massachusetts and Pennsylvania were lost, the South might preserve some nominal independence but would quickly revert to de facto colonial status.

In Europe, there is no such clarity of what constitutes a threat. Even though there is a general sense — at least among the governing elites — that Europeans share economic interests, it is very clear that their security interests are not complementary. There is no agreed-upon perception of an external threat. For Central European states that only recently became European Union and NATO members, Russia still poses a threat. They have asked NATO (and even the European Union) to refocus on the European continent and for the alliance to reassure them of its commitment to their security. In return, they have seen France selling advanced helicopter carriers to Russia and Germany building an advanced military training center in Russia.

The Regionalization of Europe

The eurozone crisis — which is engulfing EU member states using the euro but is symbolically important for the entire European Union — is therefore a crisis of trust. Do the current political and security arrangements in Europe — the European Union and NATO — capture the right mix of nation-state interests? Do the member states of those organizations truly feel that they share the same fundamental fate? Are they willing, as the American colonies were at the end of the 18th century, to give up their independence in order to create a common front against political, economic and security concerns? And if the answer to these questions is no, then what are the alternative arrangements that do capture complementary nation-state interests?

On the security front, we already have our answer: the regionalization of European security organizations. NATO has ceased to effectively respond to the national security interests of European states. Germany and France have pursued an accommodationist attitude toward Russia, to the chagrin of the Baltic States and Central Europe. As a response, these Central European states have begun to arrange alternatives. The four Central European states that make up the regional Visegrad Group — Poland, the Czech Republic, Slovakia and Hungary — have used the forum as the mold in which to create a Central European battle group. Baltic States, threatened by Russia’s general resurgence, have looked to expand military and security cooperation with the Nordic countries, with Lithuania set to join the Nordic Battlegroup, of which Estonia is already a member. France and the United Kingdom have decided to enhance cooperation with an expansive military agreement at the end of 2010, and London has also expressed an interest in becoming close to the developing Baltic-Nordic cooperative military ventures.

Regionalization is currently most evident in security matters, but it is only a matter of time before it begins to manifest itself in political and economic matters as well. For example, German Chancellor Angela Merkel has been forthcoming about wanting Poland and the Czech Republic to speed up their efforts to enter the eurozone. Recently, both indicated that they had cooled on the idea of eurozone entry. The decision, of course, has a lot to do with the euro being in a state of crisis, but we cannot underestimate the underlying sense in Warsaw that Berlin is not committed to Poland’s security. Central Europeans may not currently be in the eurozone (save for Estonia, Slovenia and Slovakia), but the future of the eurozone is intertwined in its appeal to the rest of Europe as both an economic and political bloc. All EU member states are contractually obligated to enter the eurozone (save for Denmark and the United Kingdom, which negotiated opt-outs). From Germany’s perspective, membership of the Czech Republic and Poland is more important than that of peripheral Europe. Germany’s trade with Poland and the Czech Republic alone is greater than its trade with Spain, Greece, Ireland and Portugal combined.

(click here to enlarge image)The security regionalization of Europe is not a good sign for the future of the eurozone. A monetary union cannot be grafted onto security disunion, especially if the solution to the eurozone crisis becomes more integration. Warsaw is not going to give Berlin veto power over its budget spending if the two are not in agreement over what constitutes a security threat. This argument may seem simple, and it is cogent precisely because it is. Taxation is one of the most basic forms of state sovereignty, and one does not share it with countries that do not share one’s political, economic and security fate.

This goes for any country, not just Poland. If the solution to the eurozone crisis is greater integration, then the interests of the integrating states have to be closely aligned on more than just economic matters. The U.S. example from the late 18th century is particularly instructive, as one could make a cogent argument that American states had more divergent economic interests than European states do today, and yet their security concerns brought them together. In fact, the moment the external threat diminished in the mid-19th century due to Europe’s exhaustion from the Napoleonic Wars, American unity was shaken by the Civil War. America’s economic and cultural bifurcation, which existed even during the Revolutionary War, erupted in conflagration the moment the external threat was removed.

The bottom line is that Europeans have to agree on more than just a 3 percent budget-deficit threshold as the foundation for closer integration. Control over budgets goes to the very heart of sovereignty, and European nations will not give up that control unless they know their security and political interests will be taken seriously by their neighbors.

Europe’s Spheres of Influence

We therefore see Europe evolving into a set of regionalized groupings. These organizations may have different ideas about security and economic matters, one country may even belong to more than one grouping, but for the most part membership will largely be based on location on the Continent. This will not happen overnight. Germany, France and other core economies have a vested interest in preserving the eurozone in its current form for the short-term — perhaps as long as another decade — since the economic contagion from Greece is an existential concern for the moment. In the long-term, however, regional organizations of like-minded blocs is the path that seems to be evolving in Europe, especially if Germany decides that its relationship with core eurozone countries and Central Europe is more important than its relationship with the periphery.

(click here to enlarge image)We can separate the blocs into four main fledgling groupings, which are not mutually exclusive, as a sort of model to depict the evolving relationships among countries in Europe:

The German sphere of influence (Germany, Austria, the Netherlands, Belgium, Luxembourg, Czech Republic, Hungary, Croatia, Switzerland, Slovenia, Slovakia and Finland): These core eurozone economies are not disadvantaged by Germany’s competitiveness, or they depend on German trade for economic benefit, and they are not inherently threatened by Germany’s evolving relationship with Russia. Due to its isolation from the rest of Europe and proximity to Russia, Finland is not thrilled about Russia’s resurgence, but occasionally it prefers Germany’s careful accommodative approach to the aggressive approach of neighboring Sweden or Poland. Hungary, the Czech Republic and Slovakia are the most concerned about the Russia-Germany relationship, but not to the extent that Poland and the Baltic states are, and they may decide to remain in the German sphere of influence for economic reasons.

The Nordic regional bloc (Sweden, Norway, Finland, Denmark, Iceland, Estonia, Lithuania and Latvia): These mostly non-eurozone states generally see Russia’s resurgence in a negative light. The Baltic states are seen as part of the Nordic sphere of influence (especially Sweden’s), which leads toward problems with Russia. Germany is an important trade partner, but it is also seen as overbearing and as a competitor. Finland straddles this group and the German sphere of influence, depending on the issue.

Visegrad-plus (Poland, Czech Republic, Slovakia, Hungary, Romania and Bulgaria). At the moment, the Visegrad Four belong to different spheres of influence. The Czech Republic, Slovakia and Hungary do not feel as exposed to Russia’s resurgence as Poland or Romania do. But they also are not completely satisfied with Germany’s attitude toward Russia. Poland is not strong enough to lead this group economically the way Sweden dominates the Nordic bloc. Other than security cooperation, the Visegrad countries have little to offer each other at the moment. Poland intends to change that by lobbying for more funding for new EU member states in the next six months of its EU presidency. That still does not constitute economic leadership.

Mediterranean Europe (Italy, Spain, Portugal, Greece, Cyprus and Malta): These are Europe’s peripheral states. Their security concerns are unique due to their exposure to illegal immigration via routes through Turkey and North Africa. Geographically, these countries are isolated from the main trade routes and lack the capital-generating centers of northern Europe, save for Italy’s Po River Valley (which in many ways does not belong to this group but could be thought of as a separate entity that could be seen as part of the German sphere of influence). These economies therefore face similar problems of over-indebtedness and lack of competitiveness. The question is, who would lead? And then there are France and the United Kingdom. These countries do not really belong to any bloc. This is London’s traditional posture with regard to continental Europe, although it has recently begun to establish a relationship with the Nordic-Baltic group. France, meanwhile, could be considered part of the German sphere of influence. Paris is attempting to hold onto its leadership role in the eurozone and is revamping its labor-market rules and social benefits to sustain its connection to the German-dominated currency bloc, a painful process. However, France traditionally is also a Mediterranean country and has considered Central European alliances in order to surround Germany. It also recently entered into a new bilateral military relationship with the United Kingdom, in part as a hedge against its close relationship with Germany. If France decides to exit its partnership with Germany, it could quickly gain control of its normal sphere of influence in the Mediterranean, probably with enthusiastic backing from a host of other powers such as the United States and the United Kingdom. In fact, its discussion of a Mediterranean Union was a political hedge, an insurance policy, for exactly such a future.

The Price of Regional Hegemony

The alternative to the regionalization of Europe is clear German leadership that underwrites — economically and politically — greater European integration. If Berlin can overcome the anti-euro populism that is feeding on bailout fatigue in the eurozone core, it could continue to support the periphery and prove its commitment to the eurozone and the European Union. Germany is also trying to show Central Europe that its relationship with Russia is a net positive by using its negotiations with Moscow over Moldova as an example of German political clout.

Central Europeans, however, are already putting Germany’s leadership and commitment to the test. Poland assumes the EU presidency July 1 and has made the union’s commitment to increase funding for new EU member states, as well as EU defense cooperation, its main initiatives. Both policies are a test for Germany and an offer for it to reverse the ongoing security regionalization. If Berlin says no to new money for the newer EU member states — at stake is the union’s cohesion-policy funding, which in the 2007-2013 budget period totaled 177 billion euros — and no to EU-wide security/defense arrangements, then Warsaw, Prague and other Central European capitals have their answer. The question is whether Germany is serious about being a leader of Europe and paying the price to be the hegemon of a united Europe, which would not only mean funding bailouts but also standing up to Russia. If it places its relationship with Russia over its alliance with Central Europe, then it will be difficult for Central Europeans to follow Berlin. This will mean that the regionalization of Europe’s security architecture — via the Visegrad Group and Nordic-Baltic battle groups — makes sense. It will also mean that Central Europeans will have to find new ways to draw the United States into the region for security.

Common security perception is about states understanding that they share the same fate. American states understood this at the end of the 18th century, which is why they gave up their independence, setting the United States on the path toward superpower status. Europeans — at least at present — do not see their situation (or the world) in the same light. Bailouts are enacted not because Greeks share the same fate as Germans but because German bankers share the same fate as German taxpayers. This is a sign that integration has progressed to a point where economic fate is shared, but this is an inadequate baseline on which to build a common political union.

Bailing out Greece is seen as an affront to the German taxpayer, even though that same German taxpayer has benefited disproportionally from the eurozone’s creation. The German government understands the benefits of preserving the eurozone — which is why it continues bailing out the peripheral countries — but there has been no national debate in Germany to explain this logic to the populace. Germany is still waiting to have an open conversation with itself about its role and its future, and especially what price it is willing to pay for regional hegemony and remaining relevant in a world fast becoming dominated by powers capable of harnessing the resources of entire continents.

Without a coherent understanding in Europe that its states all share the same fate, the Greek crisis has little chance of being Europe’s Shays’ Rebellion, triggering deeper unification. Instead of a United States of Europe, its fate will be ongoing regionalization.

The Eurozone Crisis and the History of Europe's Financial Institutions

German financial institutions will contribute 3.2 billion euros ($4.7 billion) to the second Greek bailout, German Finance Minister Wolfgang Schaeuble announced Thursday. The banks involved in the deal will roll over all Greek debt holdings scheduled to mature by 2014. Schaeuble added that 55 percent of the estimated 10 billion euros of Greek debt held by German financial institutions mature after 2020. German financial institutions have therefore joined their French counterparts in expressing a willingness to participate in a voluntary rollover of Greek debt.

The news from Germany and France is a positive sign for Greece and follows a successful vote in Athens to implement new austerity measures and to privatize state assets. At the press conference in Berlin, executives from Deutsche Bank and the insurer Allianz stood next to Schaeuble and offered their support to Greece. While the details of the agreements have to be settled, the overall congratulatory tone of the announcement has generated optimism that when eurozone finance ministers meet on Sunday, July 3, Greece will be offered a bailout package with terms that will include private-sector participation.

That Germany and France have managed to cajole their financial institutions to participate in the rescue of Greece is not surprising. In Europe, banks and states have historically had a close relationship. Europe’s geography naturally fosters competition — a considerable number of powerful political entities are packed into a small space. Europe is essentially overpopulated, not with people, but with countries.

The French Revolution and subsequent Napoleonic Wars kicked off a race to establish political systems based on the nation-state concept — a process that required the borders of new states not only to conform to a particular linguistic and cultural agglomeration but also to contain a substantial capital pool, preferably one that captured a key European financial center. This evolution established a break from Europe’s past, when a hegemon like Hapsburg Spain could depend on Dutch bankers for capital.

“That Germany and France have managed to cajole their financial institutions to participate in the rescue of Greece is not surprising. In Europe, banks and states have historically had a close relationship.”State building in the mid-to-late 19th century placed great strains on European governments because of the intensity of competition between rival states in such close proximity. Germany, for example, was born in 1871 following a short but intense war against France. Although Germany emerged from the war a united empire — and with a piece of France as a trophy, — it also understood that it had made a very dangerous enemy with which it had to compete to survive. Germany was under pressure to consolidate not only politically and militarily but also economically. Berlin, as well as its rivals, became obsessed with how much steel, coal and railway mileage they could produce.

Building railways, canals, schools, factories and navies requires capital. While coal and steel fueled late 19th-century industrialization, the common denominator for state building is ultimately capital. Therefore, as continental European states developed state champions of industry, they needed to create complementary state champions of finance and encourage relationships between the two. Rather than making a lot of money, the goal was to direct capital into the industries that would best ensure the state’s survival and independence.

The relationship between German industrial giant Siemens and the country’s largest financial institution, Deutsche Bank, is one of the most instructive in this regard. Executives of one often sat on the board of the other and their relationship was coordinated by the interests of the state for more than100 years.

The historical relationship between European states and financial institutions stands in contrast to the development of the United States. While the United States also faced security concerns (the threat of a British invasion) and incredible infrastructural challenges (such as the difficulty of crossing the Appalachians), these issues had either abated or been resolved by the mid-19th century. Europe was in the throes of post-Napoleonic competition and its states posed no threat to the United States. American railroad development was largely a private affair, and — while there was a geostrategic impetus to connect the coasts — the endeavor was not conducted in the atmosphere of the intense interstate competition that Europe experienced.

American financial institutions were therefore allowed to operate in almost ideal conditions for free-market competition. The main objective was to make money, not develop an economy that can defeat a neighbor in a war. It is no surprise that two of the world’s main three credit rating agencies — Moody’s and Standard & Poor’s — grew out of this era of American capitalism. Investors wanted an independent perspective of which railroad bonds and banks in which to invest. In Europe, the choice was clear — whichever institutions had the state’s backing.

The resulting differences in American and European financial systems therefore come with positive and negative attributes. One major drawback of European financial systems is that to this day many banks are thought of as social welfare institutions more than profit-driven businesses. German landesbanken and Spanish cajas come to mind as examples. Not surprisingly, these institutions are some of the most troubled banks in Europe. The second problem for Europe is that businesses have become dependent on bank lending for capital, whereas American businesses have traditionally looked to access the corporate bond market and raise capital through the stock market. The problem with the European approach is that it often stifles innovation. Companies with close relationships with financial institutions have greater access to financing than innovative start-ups. This approach also leaves corporations exposed to financial crises when banks stop lending.

However, benefits also exist. In the present case, Berlin and Paris managed to mobilize their financial institutions to help bail out a foreign state in a very short amount of time. The downside is that suspicions between EU member states remain, and the eurozone’s banking problems are somewhat a product of these suspicions. European states have jealously guarded their financial institutions for centuries. Europe needs an unified, eurozone-wide oversight mechanism presiding over the Continent’s banks to ensure that if a bank in Ireland needs to be closed, Dublin can’t stop it from happening. The fundamental difficulty is that banks are state-building tools. For states to allow a supranational entity to control these tools would be tantamount to handing over control of their destinies.

Greece is tightening its belt -- and the number of people living in poverty is surging as a result. Thousands line up in front of food banks and resort to rifling through rubbish bins. The country's financial crisis is rapidly turning into a social one -- while wealthy tax evaders manage to get off scot-free.

This time, the fight for survival last exactly 29 minutes. At precisely 3 p.m., Father Andreas, a 37-year-old Greek Orthodox priest, opens the doors of the food bank in downtown Athens. At this hour, the line of hungry people stretches all the way across the large square outside and into the street. Needy people of all ages are waiting patiently -- pensioners, unemployed people, mothers with children, immigrants, asylum seekers. "We can't let these people starve," the priest says. "They are already suffering so much. They should at least not go without food."

It is a charitable deed. But in just under half an hour, all of the kitchen's 1,200 servings have been taken, causing several dozen people to leave with empty hands and growling stomachs. They can only hope to be among the lucky ones next time.

Katarina was one of the lucky ones. The 44-year-old got her hands on eight servings of a salad made of carrots, potatoes and peas, several yoghurts and a bag of bread -- the only food her family will have today. Katarina is ashamed and prefers not to give her full name. She and her 7-year-old daughter have to take a bus in from a suburb and travel all the way across the sprawling city just to get a warm meal.

Katarina was laid off from her job at a biscuit factory roughly a year ago. Since then, she's been forced to rely on the handouts paid for by what Father Andreas calls "holy money." Katarina says there are no more jobs to be had. "No one will even pay you to stuff mailboxes with advertisements anymore," she says. "Greece is finished."

Skyrocketing Need

Spyros Xaplanteris has been coming to the food bank for a year. His shirt is greasy, his trousers tattered. "I'm driven here by need," he say. The 62-year-old lost his job in the storeroom of a Hilton hotel. "It hurts," he says. "But what am I supposed to do? I'm broke."

For weeks, thousands of enraged Greeks have been holding anti-government demonstrations outside Greece's parliament building. They come with bullhorns and banners, and a couple hundred also bring stones and Molotov cocktails. Camera crews from around the world are always there to film them, but they never turn their lenses toward those in the dark back alleys of central Athens.

In recent weeks, the needs of such people have been keeping Father Andreas and his colleagues very busy. Almost all of the 400 parishes in the Archdiocese of Athens have opened food banks like the one he runs. City officials have opened some as well.

His food bank distributes meals three times at day. Up to 2,000 come at noon, another 1,200 in the afternoon, and about another 1,000 in the evening. The workers try to make sure that they don't always supply the same people. Such vigilance is necessary because "the number of needy is skyrocketing," says one volunteer who estimates that the figure has increased by 30 percent in recent months. "But we can't be sure it will stay there," she says.

Most people who come to the food bank are so hungry that they eat their food right there on the square. They hunker down on benches and walls covered with pigeon droppings and drink water from sprinkler hoses.

Choked to Death by Belt-Tightening

Last week, Prime Minister Georgios Papandreou once again succeeded in getting a majority of Greek lawmakers to push through an austerity and privatization package worth €78 billion ($111 billion). In doing so, he was responding to pressure from the International Monetary Fund (IMF), the European Central Bank (ECB) and the European Commission. Indeed, many economic experts see the package's measures as the only way to fend off an imminent national bankruptcy at the last minute -- and the only way to save the euro from an even worse fate.

But is Papandreou saving his country to death? Savas Robolis thinks he is. "People are afraid," the 65-year-old says -- they're afraid of an uncertain future. Employees are particularly scared because they carry an unfairly high proportion of the tax burden. As a professor of economics and social policy at Athens' Panteion University and director of the Labor Institute of the General Confederation of Greek Workers, Robolis knows what he's talking about.

According to his calculations, roughly 930,000 of Greece's 960,000 registered companies have fewer than five employees. Most of these very small companies are "not very competitive," he says, and primarily focus on providing products and services to the 3.5 million private households in Greece. If household incomes sink, consumer demand will automatically fall as well. As Robolis sees it, this would mean a swift end to these small companies because they don't have enough liquidity to tide them over.

"That's exactly what's happened," Robolis complains. Over the last year, roughly 60,000 of these mini-companies have gone belly up, and he predicts at least as many closings in 2011.

'Deeply Unsettling' Developments

In 2010, the number of jobless in Greece rose by 230,000, to reach 14.8 percent. Given Greece's weak social safety net, unemployment is more or less tantamount to social bankruptcy. For example, unemployment benefits are only available for a year at a monthly rate of less than €500. After that, the state offers practically no assistance. Officials estimate that only about 280,000 of the 800,000 people without jobs are still eligible to claim unemployment benefits. This has resulted in a dramatic rise in the number of homeless people -- by up to 25 percent in Athens alone.

According to official data, unemployment is expected to climb to between 17 percent and 18 percent by the end of 2011, but the true figure could be as high as 23 percent. "That would be 1.2 million jobless people," Robolis says. The last time Greece saw something like this was in 1961, when the introduction of modern farming technology put thousands of agricultural laborers out of work.

At that time, the result was a wave of emigration to places like Germany. Robolis thinks the same thing could happen today -- but with one big difference: The people who left Greece in the 1960s were mostly unskilled workers. Robolis fears that the coming wave could be well-educated individuals with college degrees.

Greece has its tourist attractions and agricultural products. But apart from beaches, olive oil and feta, the economy doesn't have much to offer. As much as 70 percent of of Greece's economic output depends on private consumption, according to a recent study of the Friedrich Ebert Stiftung, a think tank with ties to Germany's center-left Social Democratic Party (SPD).

However, according to the study, in the last quarter of 2010, reductions in salaries and pensions drove consumption down 8.6 percent, retail sales shrank by 12 percent and 65,000 stores had to be shut down. Robolis predicts that, by 2015, when the new austerity measures are scheduled to take full effect, the standard of living for employees and pensioners will be 40 percent lower than it was in 2008. "That is deeply unsettling," he says.

Tax Cheats Have Nothing to Fear

Anxiety over current and future hardships is driving many Greeks into the streets. But while the lines continue to get longer outside food banks, many of the wealthy are getting through the crisis more or less unscathed. The average Greek consumer is now forced to pay the third-highest VAT rate in Europe, the third-highest social insurance contributions and the second-highest fuel taxes.

Two-thirds of Greeks regularly pay their taxes as well. Indeed, "contrary to widespread views," as the Friedrich Ebert Stiftung study put it, these taxes are automatically deducted along with social contributions from the paychecks of Greeks employed in both the private and public sectors. It is mainly the small wealthy class that manages to cheat the authorities out of €40 billion in tax each year. That is the OECD's estimated volume of annual tax evasion. The Greek central bank puts the losses at somewhere between €15 billion and €20 billion.

These tax cheats have little to fear. As Panos Kazakos, an Athens-based professor of politics, puts it: "I have never seen a single person put in jail for tax evasion." Robolis adds that the government, which supposedly has no money available for social services, just published a list of companies that owe the state a total of €9 billion in social contributions -- but it does nothing to get that money.

This injustice is what is making people in Greece so angry. The government has promised to change the system. But Robolis no longer has faith in its pledges. "This situation has been going on for 30 or more years," he complains. "They're just trying to protect themselves with these statements."

PARIS (AP) — All countries that use the euro should have mandatory balanced budgets and better coordination of economic policy, the leaders of France and Germany said Tuesday, pushing for long-term political solutions instead of immediate financial measures like a single European bond.

French President Nicolas Sarkozy and German Chancellor Angela Merkel also pledged to harmonize their countries' corporate taxes in a move aimed at showing the eurozone's largest members are "marching in lockstep" to protect the euro.

Both leaders stressed their commitment to defending the common currency, a cornerstone of integration on this long-fractured continent. They presented their proposals after meeting Tuesday in Paris amid signs of economic slowdown, and after an exceptionally turbulent week on financial markets prompted by concern about Europe's financial health.

Sarkozy told reporters that he and Merkel want a "true European economic government" that would consist of the heads of state and government of all eurozone nations.

The new body would meet twice a year — and more in times of crisis — and be led initially by EU President Herman Van Rompuy for a 2½-year term. After that, Sarkozy suggested, it could be opened up to other heads of states and government.

The move appeared a step toward the closer long-term economic integration that many analysts have said is inevitable to make the euro experiment survive, though it was unclear how much effect it would have in the short term.

"There has to be a stronger coordination of financial and economic policy" to protect the euro, Merkel said.

The chancellor stressed that the crisis built up over several years by the actions of several member states, and there is no solution to tackle the crisis within days now.

"We will regain the lost confidence," she said. "That is why we go into a phase with a new quality of cooperation within the eurozone," she added, referring to the proposal of forming a permanent economic government for the eurozone.

The two leaders ruled out, however, issuing common government debt in the form of eurobonds, at least for now, despite demand by many investors for such a bold but politically difficult move.

'The real lesson from Europe," wrote Paul Krugman in January 2010, "is actually the opposite of what conservatives claim: Europe is an economic success, and that success shows that social democracy works." Here are some postcards from the social democracy that works.

• In Britain, 239 patients died of malnutrition in the country's public hospitals in 2007, according to a charity called Age U.K. And at any given time, a quarter-million Britons have been made to wait 18 weeks or longer for medical treatment. This follows a decade in which funding for the National Health Service doubled.

• In France, the incidence of violent crimes rose by nearly 15% between 2002 and 2008, according to statistics provided by Eurostat. In Italy violent crime was up 38%. In the EU as a whole, the rate rose by 6% despite declines in robbery and murder.

• As of June 2011, Eurostat reports that the unemployment rate in the euro zone was 9.9%. For the under-25s, it was 20.3%. In Spain, youth unemployment stands at 45.7%, which tops even the Greek rate of 38.5%. Then there's this remarkable detail: Among Europeans aged 18-34, no fewer than 46%—51 million people in all—live with their parents.

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Zuma Press

Rioters in London: Poster children for social democracy..• In 2009, 37.4% of European children were born outside of marriage. That's more than twice the 1990 rate of 17.4%. The number of children per woman for the EU is 1.56, catastrophically below the replacement rate of 2.1. Roughly half of all Europeans belong in the "dependency" category on account of their youth or old age. Just 64% of the working-age population actually works.

I could go on in this vein for pages, but you get the point. Europe is not a happy place and hasn't been for nearly a generation. It's about to get much worse.

This isn't simply because Europe's economic crisis is still in its infancy, although it is. The tab for bailing out Greece, Portugal and Ireland alone—which together account for about 5% of euro-zone GDP—already runs to hundreds of billions of euros, with no resolution in sight. By contrast, Italy's GDP is more than seven times as large as Greece's. Italy is too big to fail—and too big to save. If the so-called PIIGS wind up leaving the euro zone (or if Germany beats them to it by returning to a Deutsche mark), the dislocations will take years to sort through.

Even then, Europe will still have to address the more profound challenges of economic growth, demography and entitlement reform. But in order for it to do so it must have a clear idea of the nature of the challenges it faces. It doesn't. It also requires political resources to overcome the beneficiaries—labor unions, pensioners, university students, farmers, Brussels technocrats and so on—of the current system. That's not going to happen.

Politics, for starters, prevents it. Whenever a supposed "neo-liberal" comes to power—whether it's Nicolas Sarkozy or Silvio Berlusconi or Angela Merkel—they typically wind up doing no more than tinkering around the edges of regulatory or tax reform. That's because they are stymied by coalition compromises at home, or by European compromises in Brussels, or by some deeper failure of will and character.

Margaret Thatcher was the exception to this rule. But in both Britain and Europe she has had neither equals nor heirs.

Demography also prevents reform. The median age in the EU is 40.6 years. (In the U.S. it's 36.9). Older populations typically resist change, demand the benefits they've been taxed all their working lives for—and vote. The demographic balance is only going to tip further in their favor, and it will change only when younger Europeans decide that children, plural, are worth having. What that will take, only a faith in future prosperity—and in God—can provide. Outside of its growing Muslim population, Europe has neither.

Finally, there is ideology. For the past four decades, "Europeanism" has been an amalgam of Keynesian economics, bureaucratic centralization, and welfarism, corporate and social. Even now, the ideology remains unshaken by events. Though there is plenty of talk about getting spending under control and balancing budgets (typically by way of tax increases), nobody in Europe is proposing a serious growth agenda. At the beginning of the Greek crisis I asked a visiting official from Athens what his ideas were for growth: He suggested olive tree plantations and wind farms. He might as well have thrown a Sicilian Expedition into the mix.

For the U.S., none of this is yet in our cards: That's guaranteed by the tea party that so many Europeans (and Paul Krugman) find so vulgar. But it's worth noting what the fruits of social democracy—a world in which, as Kipling once wrote, "all men are paid for existing and no man must pay for his sins"—really are. And in the wake of the U.K. riots, the rest of his prophecy also bears repeating:

German Chancellor Angela Merkel and French President Nicolas Sarkozy met in Paris today to prepare for the next meeting of European Union heads of government. At the conclusion of their summit, the pair announced a series of measures meant to push European integration forward.

Instead of addressing Europe’s short-term financial crisis, the two leaders focused on longer-term fiscal and political issues. Specifically, they announced that France and Germany would unify their corporate tax systems within five years and that the countries would together push for debt limits to be written into eurozone-member constitutions. They also agreed to advocate for governance measures to reinforce Europe’s economy.

Markets were left puzzled. The European financial crisis is now in its twentieth month. As recently as a few days ago, many observers were expecting bailouts for Spain, defaults in Italy and downgrades in France. Why would Europe’s top leaders choose to introduce measures that will require a new treaty, while the European project is already struggling so badly on its current terms?

“Considering that the Germans are in the process of rewiring the EU to suit their own national preferences, the entire premise behind EU membership for many states rests on precarious ground. “What the markets often lose sight of is that this situation is not only — or even primarily — a financial and economic crisis. France originally intended European integration as a means to bolster its international position. Germany was shattered after the conclusion of World War II. The French picked up the pieces and, by initiating the process that eventually led to the creation of the European Union, Paris refashioned Germany into a platform from which France could project power. This system used German strength to entice other states to join the growing union. France promised three things: that European states would be more important collectively; that members would become rich by relying on German wealth; and that Germany would never again be in a position to hurt other European states.

By the middle part of the last decade, though, Germans had outgrown sixty years of policymaking shaped by what can be best described as an extended national apology. Germany began acting like a real country again. Real countries have many characteristics in common. They obviously like to speak for themselves, and they don’t like to be taken advantage of by their neighbors.

Germany started using its superior economic position to rework EU institutions to its liking. Until now, France has cooperated, driven by a mix of inertia, opportunity and fear. Inertia because it takes more than a few years to admit that after two generations, the ability to feed off the strengths of another economy without paying any price is gone. Nevertheless, opportunity still motivates because Paris may yet prove able to manage Germany and ride on its coattails. Fear of what might happen should Germany outgrow France also fuels Parisian cooperation.

The European economy is hardly a zero sum game. However, in the modern European system, economics is the glue that has held together the unstable political alignments of the post-World War II order. And that glue is not sticking like it once did.

Of the three main benefits that drew states into the European Union, two — that European states are more important collectively, and that other states can become rich thanks to German wealth — are no longer in play. The European Union’s efforts at political and military unification can best be described as stillborn. Economically, the current crisis has robbed the European Union of much of its shine. Data released today put collective EU growth at an unenviable 0.2 percent compared to the previous quarter. French growth came in at a flat zero. If the European Union cannot guarantee importance or wealth, then its remaining raison d’etre comes down to keeping the Germans in line. Considering that the Germans are in the process of rewiring the union to suit their own national preferences, the entire premise behind EU membership for many states rests on precarious ground.

Against this backdrop sits a massive disconnect between what the European elites — especially in the financial sector – desire and what the general population prefers. The elites have invested seventy years and tens of trillions of euros (once financial assistance, bond purchases and cross-collateralization of debt are all added up) to make European institutions work. The European Union is the key to their political and economic positions. They have already made it clear that they will pay any price to keep the European Union alive.

However, the average German, Frenchman or Latvian feels somewhat differently. With the benefits of the European system losing their luster, questions are starting to be asked about not just the EU institutions, but about whether European leaders are still fit to lead. Polls regularly indicate that half of Germans want the deutschemark back, and more than half think the Greeks should be unceremoniously ejected from the eurozone. So far these attitudes have not translated into a rejection of any major state’s political mainstream — but the Germans’ general disgust with the bailout programs is hardly an enthusiastic endorsement.

By Brian Rohan | Reuters – 12 hrs agotweet5Share0EmailPrintRelated ContentArticle: Greek central bank provided emergency funding to banksReuters - 13 hrs agoBERLIN (Reuters) - The interruption of talks between Greece and international lenders on a new aid tranche is a blow to the stability of Europe's currency, the deputy leader of Germany's junior coalition partners said on Saturday.

"The breakdown of talks between the Troika and Greece is a blow to the stability of the euro," he said at a news conference in Berlin.

Referring to Greece's failure to meet deficit targets set in exchange for a second bailout package, Lindner said Athens was shirking responsibilities to which it had agreed.

"This is not about non-binding statements of intent, but contractually secured reciprocity for the emergency loans," he said. "We insist these agreements are observed."

Talks between Greece and the EU, IMF and ECB were put on hold on Friday after disagreement over why Athens has fallen behind schedule in cutting its budget deficit and what it must do to catch up.

The unplanned early departure of senior inspectors from the three bodies showed tension between Athens and its lenders over reforms, as clouds gathered over the second bailout package aiming to pull the country out of a severe debt crisis.

Separately, senior FDP official Hermann Otto Solms, a vice-president of the Bundestag and an economy committee member in parliament said since Greece could not handle its debt problem and it should consider leaving the euro.

"It should be considered whether a restructuring and exit from the euro would offer better perspectives for the currency union and Greece itself," he told Frankfurter Allgemeine Sonntagszeitung.

The pro-business FDP styles itself as a defender of the German taxpayer, a stance Lindner reiterated in his statement over Greece.

"Taxpayers in Northern Europe and especially Germany cannot accept inability or reluctance. In the eyes of the FDP, Greece must reaffirm its will for stability and reform."

"Mediation or postponements are no longer acceptable for us. The heads of the IMF and euro countries should therefore travel to Athens immediately to obtain binding declarations toward the fulfillment of the agreed goals."

In another comment to a newspaper, Gerda Hasselfeldt, who chairs the group of Chancellor Angela Merkel's Bavaria's sister party the Christian Social Union (CSU) in parliament, said Greece was not doing enough to tackle its debt problem.

"When you receive help, you must prove yourself reliable," she told the Tagesspiegel am Sonntag.

Nearly 40 percent of Europeans suffer mental illnessBy Kate Kelland LONDON (Reuters) - Europeans are plagued by mental and neurological illnesses, with almost 165 million people or 38 percent of the population suffering each year from a brain disorder such as depression, anxiety, insomnia or dementia, according to a large new study.

With only about a third of cases receiving the therapy or medication needed, mental illnesses cause a huge economic and social burden -- measured in the hundreds of billions of euros -- as sufferers become too unwell to work and personal relationships break down.

"Mental disorders have become Europe's largest health challenge of the 21st century," the study's authors said.

At the same time, some big drug companies are backing away from investment in research on how the brain works and affects behavior, putting the onus on governments and health charities to stump up funding for neuroscience.

"The immense treatment gap ... for mental disorders has to be closed," said Hans Ulrich Wittchen, director of the institute of clinical psychology and psychotherapy at Germany's Dresden University and the lead investigator on the European study.

"Those few receiving treatment do so with considerable delays of an average of several years and rarely with the appropriate, state-of-the-art therapies."

Wittchen led a three-year study covering 30 European countries -- the 27 European Union member states plus Switzerland, Iceland and Norway -- and a population of 514 million people.

A direct comparison of the prevalence of mental illnesses in other parts of the world was not available because different studies adopt varying parameters.

Wittchen's team looked at about 100 illnesses covering all major brain disorders from anxiety and depression to addiction to schizophrenia, as well as major neurological disorders including epilepsy, Parkinson's and multiple sclerosis.

The results, published by the European College of Neuropsychopharmacology (ENCP) on Monday, show an "exceedingly high burden" of mental health disorders and brain illnesses, he told reporters at a briefing in London.

Mental illnesses are a major cause of death, disability, and economic burden worldwide and the World Health Organization predicts that by 2020, depression will be the second leading contributor to the global burden of disease across all ages.

Wittchen said that in Europe, that grim future had arrived early, with diseases of the brain already the single largest contributor to the EU's burden of ill health.

The four most disabling conditions -- measured in terms of disability-adjusted life years or DALYs, a standard measure used to compare the impact of various diseases -- are depression, dementias such as Alzheimer's disease and vascular dementia, alcohol dependence and stroke.

The last major European study of brain disorders, which was published in 2005 and covered a smaller population of about 301 million people, found 27 percent of the EU adult population was suffering from mental illnesses.

Although the 2005 study cannot be compared directly with the latest finding -- the scope and population was different -- it found the cost burden of these and neurological disorders amounted to about 386 billion euros ($555 billion) a year at that time. Wittchen's team has yet to finalize the economic impact data from this latest work, but he said the costs would be "considerably more" than estimated in 2005.

The researchers said it was crucial for health policy makers to recognize the enormous burden and devise ways to identify potential patients early -- possibly through screening -- and make treating them quickly a high priority.

"Because mental disorders frequently start early in life, they have a strong malignant impact on later life," Wittchen said. "Only early targeted treatment in the young will effectively prevent the risk of increasingly largely proportions of severely ill...patients in the future."

David Nutt, a neuropsychopharmacology expert at Imperial College London who was not involved in this study, agreed.

"If you can get in early you may be able to change the trajectory of the illness so that it isn't inevitable that people go into disability," he said. "If we really want not to be left with this huge reservoir of mental and brain illness for the next few centuries, then we ought to be investing more now."

What Comes After 'Europe'? The riots of Athens will become those of Milan, Madrid and Marseilles. Border checkpoints will return. Currencies will be resurrected, then devalued.By BRET STEPHENS

When the history of the rise and fall of postwar Western Europe is someday written, it will come in three volumes. Title them "Hard Facts," "Convenient Fictions" and—the volume still being written—"Fraud."

The hardest fact on which postwar Europe was founded was military necessity, crisply summed up by Lord Ismay's famous line that NATO's mission was "to keep the Russians out, the Americans in, and the Germans down." The next hard fact was hard money, the gift of Ludwig Erhard, author of the economic reforms that created the Deutsche mark, abolished price controls, and put inflation in check for generations. The third hard fact was the creation of Jean Monnet's common market that gave Europe a shared economic—not political—identity.

The result was the Wirtschaftswunder in Germany, Les Trente Glorieuses in France and il miracolo economico in Italy. It could have lasted into the present day. It didn't.

In 1965, government spending as a percentage of GDP averaged 28% in Western Europe. Today it hovers just under 50%. In 1965, the fertility rate in Germany was a healthy 2.5 children per mother. Today it is a catastrophic 1.35. During the postwar years, annual GDP growth in Europe averaged 5.5%. After 1973, it rarely exceeded 2.3%. In 1973, Europeans worked 102 hours for every 100 worked by an American. By 2004 they worked just 82 hours for every 100 American ones.

It was during this general slowdown that Europe entered the convenient fiction phase. There was, for starters, the convenient fiction that if you just added up the GDP of the European Union's expanding list of member states, you had an economy whose size exceeded that of the United States. Didn't this make "Europe" an economic superpower? There was the convenient fiction that Europe didn't need robust military capabilities when it could exert global influence through diplomacy and soft power. There was the convenient fiction that Europeans shared identical values and could thus be subject to uniform regulations governing crime and punishment. There was the convenient fiction that Continentals weren't lagging in productivity but were simply making an enlightened choice of leisure over labor.

And there was, finally, the whopping fiction that Europe had its own "model," distinct and superior to the American one, that immunized it from broader international currents: globalization, Islamism, demography. Europeans love their holidays and thought they were entitled to a long holiday from history as well.

All this did wonders, for a while, to mask European failures and puff up European pride. But there is always a danger in substituting grandiosity for achievement, mistaking pronouncements for facts, or, more generally, believing in your own nonsense.

Here is where Europe slipped from convenient fiction to outright fraud.

There was the fraud of Greece's entry into the euro, a double-edged affair since Athens lied about its budgetary figures and Brussels chose to accept the lie. There was the fraud of the so-called Maastricht criteria—the fiscal rules that were supposed to govern the euro only to be quickly flouted by France and Germany and then junked altogether in the current crisis. There was the fraud of the European Constitution, overwhelmingly rejected wherever a vote on it was permitted, only to be revised and imposed by parliamentary fiat.

What is now happening in Europe isn't so much a crisis as it is an exposure: a Madoff-type event rather than a Lehman one. The shock is that it's a shock. Greece was never going to be bailed out and will, sooner or later, default. The banks holding Greek debt will, sooner or later, be recapitalized. The recapitalization will be borne by German taxpayers, and it will bring them—sooner rather than later—to the outer limit of their forbearance. The Chinese will not ride to the rescue: They know not to throw good money after bad.And then Italy will go Greek. Europe's crisis will lap on U.S. shores, and America's economic woes will lap on Europe's—a two-way tsunami.

America will survive this because America is a state. But as Bismarck once remarked, "Whoever speaks of Europe is wrong. Europe is a geographical expression." The "fiscal union" that's being mooted will never come to pass: German voters won't stand for it, and neither will any other country that wants to retain fiscal independence—which is to say, the core attribute of democratic sovereignty.

What comes next is the explosion of the European project. Given what European leaders have made of that project over the past 30-odd years, it's not an altogether bad thing. But it will come at a massive cost. The riots of Athens will become those of Milan, Madrid and Marseilles. Parties of the fringe will gain greater sway. Border checkpoints will return. Currencies will be resurrected, then devalued. Countries will choose decay over reform. It's a long, likely parade of horribles.

Where is the Europe of Ismay, Erhard and Monnet? It's there in memory, if anyone cares to recover it. Give it another 50 years, and maybe someone will.

By George FriedmanAn important disconnect over the discussion of the future of the European Union exists, one that divides into three parts. First, there is the question of whether the various plans put forward in Europe plausibly could result in success given the premises they are based on. Second, there is the question of whether the premises are realistic. And third, assuming they are realistic and the plans are in fact implemented, there is the question of whether they can save the European Union as it currently exists.The plans all are financial solutions to a particular set of financial problems. But regardless of whether they are realistic in addressing the financial problem, the question of whether the financial issue really addresses the fundamental dilemma of Europe — which is political and geopolitical — remains.STRATFOR has examined the plans for dealing with the financial crisis in Europe, and we find them technically plausible, even if they involve navigating something of a minefield. The eurozone’s bailout fund, the European Financial Stability Facility, would be expanded in scope and reach until it can handle the bailout of a major state, the default of a minor state and a banking crisis of unprecedented proportions. Given assumptions of the magnitude of the problem and assuming general compliance with the plans, there is a chance that the solution we see the Germans moving toward could work.The extraordinary complexity of the plans being floated in Europe is important to note. It is extremely difficult for us to understand the specifics, and we suspect the politicians proposing it are also less than clear on them. We have found that the more uncertain the solution, the more complex it is. And the complexity of the European situation is less driven by the complexity of the economics than by the complexity of the politics. The problem is relatively easy: Banks and countries under massive financial pressure almost certainly will default without extensive aid. By giving them money, default can be avoided. But the political complexity of giving them money and the opposition by many Europeans on all sides to this solution contributes to the complexity. The greater the complexity, the more interests can be satisfied and — ultimately — the less understanding there is about what has been promised. Some subjects require complexity, and this is one of them. The degree of complexity in this case tells another tale.The Foundation of the CrisisPart of that tale is about two dubious assumptions at the foundation of the crisis. The first is the assumption that interested parties are genuinely aware of the size of the financial problems, and to the extent they are aware of it, that they are being honest about it. Ever since 2008, the singular truth of the financial community globally has been that they were either unaware of the extent of the financial problems on the whole or unaware of the realities of their own institutions. An alternative explanation is, of course, willful ignorance. This translates as the leaders being fully aware of the magnitude of the problem but understating it to buy time or to position themselves personally for better outcomes. It could also simply be a case of their being engaged in helpless hopefulness — that is, they knew there was nothing they could do but remained hopeful that someone else would find a solution. In sum, it combined incompetence, willful deception and willful delusion.Consider the charge that the Greeks falsified financial data. While undoubtedly true, it misses the point. The job of bankers is to analyze data from loan applicants and to uncover falsehoods. The charge against the Greeks can thus be extended to bankers. How could they not have discovered the Greek deception?There are two answers. The first is that they didn’t want to. The global system of compensation among financial institutions — from home mortgages to the purchase of government bonds — separates the transaction from the outcome. In other words, in many cases bankers are not held responsible for the outcome of the loan and are paid for the acquisition and resale of the loan alone. They are therefore not particularly aggressive in assessing the quality of a given loan. Frequently, they work with borrowers to make their debt look more attractive.During the U.S. subprime crisis, in the mortgage crisis in Central Europe and in the sovereign debt and banking crisis in Europe, the system placed a premium on transactions, immunizing bankers from the repayment of loans. The validity of the numbers systematically were skewed toward the most favorable case.More important, such numbers — not only of the status of loans but also about the economic and social status of the debtors — inherently are uncertain. This is crucial because part of the proposed European solution is the imposition of austerity on debtor nation states. The specifics of that austerity and its effect on the ability to repay after austerity heavily depend on the validity of available economic and social statistics.There is an interesting belief, at least in the advanced industrial countries, that government-issued statistics reflect reality. The idea is that the people who issued these statistics are civil servants, impervious to political pressure and therefore likely providing accurate data. A host of reasons exists for looking at national statistics with a jaundiced eye beyond the risk of politicians pressuring civil servants.For one, collecting statistics on a society is a daunting task. Even small countries have millions of people. The national statistical database is based on the assumption that all of the transactions and productions of these millions can be measured accurately, or at least measured within some knowable range of error. This is an overwhelming undertaking.The solution is not the actual counting of transactions — an impossible task — but the creation of statistical models that make assumptions based on various methodologies. There are competing models that provide different outcomes based on sampling procedures or mathematical models. Even without pressure from politicians, civil servants and their academic mentors have personal commitments to certain models.The center of gravity of our global statistical system, particularly those of advanced industrial countries, is that the selection of statistical models is frequently subject to complex disputes of experts who vehemently disagree with one another. This is also a point where political pressure can be applied. Given the disagreements, the decision on which methodology to use — from sampling to reporting — is subject to political decisions because the experts are divided and as contentious as all human beings are on any subject they care about.And this is the point at which outside decisions are made, based on outcome, not on the subtleties of mathematical modeling. There is a connection between the numbers and reality, but the mathematics of a bailout rests on a statistical base of sand. It is always assumed that this is the case in the developing world. This creates a certain advantage, in that it is understood that the statistics are unreliable. By contrast, the advanced industrial countries have the hubris to believe that complex mathematics has solved the problem of knowing what hundreds of millions of people in billions of transactions actually have done.A Culture of Opaque StatesCompounding this challenge, the European Union has incorporated societies on its periphery that never have accepted the principle that states must be transparent, a problem exacerbated by EU regulations. Southern and Central Europeans always have been less impressed by the state than Germans, for example. This is not simply about paying taxes but about a broader distrust of government, something deeply embedded in history. Meanwhile, regulations from Brussels, whose tax and employment laws make entrepreneurship and small business ownership extraordinarily difficult, have forced a good deal of the economy “off the books,” aka, underground.While not an EU state, Moldova — said to be the poorest country in Europe — is an instructive example. When I visited it a year ago, the city (and villages outside the city) were filled with banks (from Societe Generale on down) and BMWs. There was clear poverty, but there also was a wealth and vibrancy not captured in intergovernmental statistics. The numbers spoke of grinding poverty; the streets spoke of a more complex reality.What exactly is the state of the Greek, Spanish or Italian economy? That is hard to say. Official statistics that count the legal economy suffer from methodological uncertainty. Moreover, a good deal of the economy is not included in the numbers. One assessment says that 10 percent of all employees are off the books. Another says 40 percent of Greeks define themselves as self-employed. A third estimates that 40 percent of the total Greek economy is in the grey sector. When evaluating what tries to remain hidden, you’re reduced to guesswork. No one really knows, any more than anyone really knows how many illegal immigrants are participating in the U.S. economy. The difference, however, is that this knowledge is of profound importance to the entire EU bailout.The level of indebtedness and the ownership of the debt of European banks and countries are as murky as who held asset-backed securities in the United States. Yet there is a precise plan designed to solve a problem that can’t be quantified or allocated. The complexity and precision of the plan fails to recognize the uncertainty because the governments and banks are loath to admit that they just aren’t certain. The banks have grown so big and their relationships so complex that the uncertainty principle parallels the state’s. The United States — where the same governing authority handles all fiscal, monetary and social policies — powered through such uncertainties in the 2008 financial crisis by sheer mass and speed. Europe, with dozens of (often competing) authorities, so far has found it impossible to exercise that option.The countries that face default and austerity have no better understanding of their own internal reality than the financial institutions understand their own internal reality. Greek numbers on the consequences of austerity for government workers do not take into account that many of those workers show up to work only occasionally while working another job that is not taxed or known to the state statistical services. Thus, one has a complete split between the state and banking systems’ ability to honor debt obligations, the insistence on austerity and the social reality of the country.Germany has always been different. Ever since the early 19th century German philosopher Georg Hegel declared the German civil service had ended history, the idea of the state as the embodiment of reason has meant something to Germans that it did not mean to others — in both a noble and a horrible sense. We are now at the noble end of the spectrum, but the idea that the state is the embodiment of reason still doesn’t capture the European reality. The Brussels bureaucracy is based on the German view that a disinterested civil servant can produce rational solutions that partisan politicians and self-interested citizens could not.The founding concept of the European Union involves joining nations that do not share this view, and even find it bizarre, with a nation for which it is the cultural core. This has created the fundamental existential issue in the European Union.The realization that the rational civil servants of Brussels and Berlin have failed to create systems that understand reality strikes at German self-perceptions. There is a willful urge to retain the perception that they understand what is going on. From the standpoint of Southern and Central Europe, the realization that the Germans genuinely thought that the states on the EU periphery had reached the level of precision of the German civil services (assuming Germany had in fact reached that stage), or that they even wanted to, is a shock. Their publics, which saw the European Union as a means of getting in on German prosperity without undergoing a massive social upheaval putting the state and the civil service — disciplined and rational — at the center of their society, experienced an even greater shock.The political and geopolitical problem is simply this: Germany is unique in Europe in terms of both size and values. It tried to create a free trade zone based on German values allied with France that looked at the world in a much more complex way. The crisis we are seeing, which Germany is trying to solve with extraordinary complexity and precision, rests on a highly unstable base. First, the European banking system, like the American banking system, does not understand its status. Second, the entire mathematics of national statistics is inherently imprecise. Third, the peripheral countries of the European Union have economies that cannot be measured at all because their informal economies are massive. The fundamental principles and self-conception of Germany and Central Europe diverge massively. The elites of these countries might like to think of themselves as Europeans first — by the German definition — but the publics know they are not, and they don’t want to be.The precision of the bailout schemes reveals the underlying misunderstanding of reality by Europe’s elites, and specifically by the Germans. To be more precise, this is willful misunderstanding. They all know that their precision rests on a foundation of uncertainty. They are buying time hoping that prosperity will return, mooting all of these problems. But the problem is that a precise solution to a vastly uncertain problem is unlikely to return Europe to its happy past. Reality — or rather the fundamental unreality of Europe — has returned.In some sense, this is no different from the United States and China. But the United States has its Constitution and the Civil War’s consequences to hold itself together in the face of this problem, and China has the Communist Party’s security apparatus to give it a shot. Europe, by contrast, has nothing to hold it together but the promise of prosperity and the myth of the rational civil servant — the cultural and political side of the underlying geopolitical problem.

Europe Entering the Danger ZoneThe European financial crisis is consuming all available attention in Europe and quite a bit beyond Europe as well. Its causes are many, but can be summed up as a massive overcrediting of states, banks and corporations that now must be dealt with. STRATFOR has outlined the path we see the Europeans following in order to find a way out of the crisis. Key to this effort is the eurozone bailout mechanism — the European Financial Stability Facility (EFSF) — which upon full ratification will have the legal powers to address many of Europe’s financial woes. The only real obstacle remaining to the expansion of the EFSF’s powers is the approval of Slovakia, and after another drama-filled week we expect Bratislava to give its assent. It was widely believed that after Slovakia approved the EFSF reforms, things in Europe would quiet down somewhat. Though the EFSF would still not be large enough to handle the full scope of problems, the facility’s upgrading would have bought the Europeans some time to figure out how to expand the EFSF to a larger, more capable force.However, two developments on Tuesday raise the possibility — even likelihood — that Europe’s financial woes are about to worsen severely.The first development is a decision by Moody’s Investor Service credit ratings agency to downgrade Italian government debt by three notches to A2 with a negative outlook. The cost to Italy of borrowing from international markets is about to go up dramatically. It’s hard to recall another time a state that wasn’t on the final verge of default or receivership faced a triple downgrade. ” Two developments on Tuesday raise the possibility — even likelihood — that Europe’s financial woes are about to worsen severely.”Not that Italy isn’t deserving. The foibles of Prime Minister Silvio Berlusconi long ago degenerated from entertaining to debilitating. He’s gutted his government and coalition of competent individuals for fear they may seek to displace him. The only remaining technocrat in the government’s upper echelons, Economy and Finance Minister Giulio Tremonti, is now regularly used as Berlusconi’s scapegoat for the government’s meek efforts at budgetary control. The southern two-thirds of Italy has always been a massive drain on state coffers, and at 120 percent of gross domestic product, the state debt is the highest in the eurozone outside of Greece. The second development is the sudden deterioration of Dexia, a major Franco-Belgian bank, which has cast the other side of the European debt crisis into stark relief. The overcrediting of Europe was not limited to governments. Between the sudden cheapening and glut of credit in the 2000s and a massive consumption boom, most of Europe’s banks are massively overextended and undercapitalized. Imagine the U.S. subprime disaster, but not limited to any particular region or subsector. That’s the scale of the problem Europe’s banking sector faces. After weeks of formal denials out of governments and the EU Commission, European Commissioner for Internal Market and Services Michel Barnier finally broke with the party line today describing the rapidly worsening status of Europe’s banks as “a fact of life.”But even among European banks, Dexia stands out as one of the worst. Dexia holds roughly 520 billion euros in assets but has only 8.8 billion euros in equity, making for a leverage ratio of approximately 60:1. A healthy ratio would be 10:1. For comparison, when the American firm Lehman Brothers went bust in 2008 its ratio was 31:1. This isn’t only a bank that has failed, it has now failed twice. It crashed the first time back in 2008, when a 6.4 billion-euro bailout allowed it to linger on to the present day (what’s left of that 6.4 billion euro is included in the 8.8 billion figure of available equity). As a consequence of that bailout, Dexia became majority state-owned (23.3 percent by various French government interests, and 30.5 percent Belgian government interests). Belgian and French authorities now appear set to break Dexia apart, loading its bad assets into a separate facility which will likely leech off of taxpayer money until they can be formally disposed off. The problem is that there isn’t much Belgian taxpayer money to be brought to bear. After all, Dexia has long served as a primary supplier of capital to Belgium’s national and regional governments. Very conservatively, Dexia is going to be absorbing 10 billion euros in government resources, and that’s assuming there are no problems with the 20 billion euros in Greek, Portuguese and Italian government bonds that the bank holds. Belgium, like Italy, is getting deeper in debt and finding it increasingly difficult to tap international capital markets — particularly in the sort of big chunks that would be required to wind down Dexia. And while Italy’s governing leadership can be charitably described as eccentric, Belgium’s is quitting: the country has been without a government for 480 days and in September, acting Prime Minister Yves Leterme announced he’d soon be leaving his job. The Europeans now face three challenges. First, while the EFSF is nearly ready to enter into reinvigorated force, it is not nearly large enough to handle an Italian bailout. That would require — at minimum — 700 billion euros. Second, while the new and improved EFSF is designed to handle bank bailouts as well, and it probably can handle Dexia, the bank is the proverbial canary in a coal mine. There are many more banks like Dexia, some several times as large, and bailing them out will cost vastly more than the EFSF’s functional ceiling of 440 billion euros would cover. Third, as the Dexia-Belgium crossover vividly underscores, Europe’s sovereign debt and banking crises are formally interlinked: a broke government cannot recapitalize damaged banks while damaged banks cannot help finance a broke government. Should one side stumble, the result is a near-immediate cascade of failures on the other. And all of this assumes that Greece, which has heretofore served as the crisis’ epicenter, doesn’t throw any more unexpected problems Europe’s way.

The European CounterbalanceThe director of the European Department of the International Monetary Fund (IMF), Antonio Borges, startled observers Wednesday when he suggested the IMF could expand its assistance to Europe by taking the unorthodox step of directly intervening in their sovereign debt markets. Borges then backtracked on these statements mere hours later, saying that the IMF is not actually contemplating such a strategy and that pursuing it would require a discussion among IMF member states.

The causes behind this jarring series of events currently are unclear, but a number of possibilities exist. Borges could have simply let details from an internal brainstorming session slip out and then been called back into line, or his suggestion could be a sign of an internal struggle in the IMF over the best course of action to redress the deteriorating situation in Europe. It is even possible that the statement was intended to float the idea of bond market intervention to the IMF’s global audience to gauge reactions and steer the dialogue in that direction.“There is a massive amount of inertia built up in the European experiment, an enormous amount of attachment to costs already paid — the flip side of which is an abiding fear of dissolution.”Another possibility is that, viewing the mounting concern over the crisis, the IMF has decided to brandish its $396 billion lending capacity, perhaps in an effort to convince investors to rethink any bets against Europe. Public officials regularly employ rhetoric as a tool to impact financial markets; it costs a lot less than dipping into tax money and is often effective in the short run. On Tuesday, for example, EU economy minister Olli Rehn hinted at a “coordinated” and “concerted” bank recapitalization effort, which triggered a surge of buying in equities and other asset markets. Rehn’s words, like Borges’, are only words, and the markets will soon forget them.It will take much more than words to fix Europe. STRATFOR has put the cost of shoring up Europe in the medium term in the realm of 2 trillion euros. Despite the fact that the cost to the globe of a European financial collapse would vastly outstrip this amount, interested parties from the IMF to the Chinese and even the Europeans themselves have not been able to materially abate the crisis. The reason is simple. All solutions to date have attempted to shuttle funds from healthier balance sheets onto the balance sheets of bankrupt lenders and countries on the verge of default. Cobbling together enough hard capital to tamp down this crisis will almost certainly prove impossible.Aside from the sheer magnitude of the fundraising challenge, this poses a special kind of problem in Europe, where the incompatible sentiments of nationalism and European unity have checked the distribution of financial losses, as exemplified by the current legal spat between the lenders of Austria and the government and homeowners of Hungary. There is very little political room and virtually no financial ability for countries to take losses voluntarily.However, there is one counterbalancing force in Europe that has not been discussed as much as the forces that threaten to break it. There is a massive amount of inertia built up in the European experiment, an enormous amount of attachment to costs already paid — the flip side of which is an abiding fear of dissolution. It is the fear that without economic integration, devastating warfare on the continent could again become conceivable. For some, it is the fear that a resurgent Russia may once again pose a threat. It is also the very real fear that dissolution would lead to economic irrelevance in a world where dynamic economies along the Pacific Rim increasingly call the shots.It is this fear and inertia that could force Europe’s political and financial adjustment in the not-too-distant future. Europe has not yet faced an event on the scale of 9/11 or the Lehman Brothers bankruptcy. It has not been violently confronted by the prospect of collapse. The same states that now bicker over cobbling together capital measuring in the tens of billions of euros would, in the face of such an event, suddenly find themselves in agreement on a much larger, more streamlined “bailout” package linked to central bank credit.Averting financial collapse would not address the core differences of the various European states; underlying tensions would remain. And since there is every reason to think the bigger price tags involved would be accompanied by a proportionate loss of national sovereignty, the seeds of Europe’s next set of problems would be sown.

The Franco-Belgian bank Dexia started collapsing Oct. 4, ushering the latest chapter of the nearly 2-year-old European financial crisis. Considering that Dexia is on the list of the top 50 global financial institutions, it is worth examining what happens during a bank bailout and shutdown process and applying that to the Dexia situation.In minor cases, a cash infusion from a government is usually sufficient to hold the bank over until such time that normal economic growth can help the bank regenerate its finances. Growth has been middling in Belgium since 2008, and Dexia simply hasn’t been able to get out from under the problems caused by its non-performing assets.In moderate cases, governments come in and take a percentage share of ownership of the bank, putting their own representatives on the bank’s board and forcibly restructuring it. This has already been done for Dexia, too. In the aftermath of that 2008 bailout, Dexia became majority-owned by various governments in France and Belgium.But the restructuring procedures have not followed what we would consider to be a standard course. Normally, there are major changes at the top and policies are adjusted all throughout to make sure that the sort of indiscretions that led to the bank problems in the first place don’t happen again. Dexia, however, is not a normal consumer or business bank. Instead, much of its business comes from supplying credit to various parts of the Belgian state apparatus.So when these entities took greater control of Dexia back in 2008, instead of encouraging Dexia to engage in more lending to private enterprise, which might actually regenerate its loan book, they instead encouraged Dexia to invest more in their dead issuances, allowing them to run larger deficits than they would’ve been able to otherwise. Somewhat ironically, the last bailout actually only reinforced the bad policies that had gotten Dexia into trouble the first place.The final option is some sort of dissolution —typically the bank is broken up into pieces. The good pieces typically find eager buyers who are willing to pay more or less market value. The bad pieces, however, have to be bundled into some sort of bad bank where ultimately they are sold off piecemeal at pennies on the dollar. This is really the only option that is left for Dexia. But there are several problems even with this strategy.First, any good asset sales right now in the current environment are not going to be bringing what we would consider full market value. Europe is basically in a mild recession at present — it could get a lot worse because of the financial crisis — and European banks have so far proven unwilling to lend much money to each other, much less go out and grab assets from a failed bank and one of Europe’s most debt-heavy states. Which means that the losses that the state is going to absorb when this is all resolved are going to be much higher than they would normally be.Second, Belgium doesn’t have the money to absorb the losses of the bad bank right now anyway. Belgium already has a national debt of 100 percent of GDP and is having problems raising capital under normal circumstances — much less the sort of large infusion that would be required for a bailout of Dexia. Additionally, under normal circumstances, Belgium would turn to Dexia for financing — that’s obviously not an option anymore, which means, at least in the initial stages, the financial burden is going to be carried by France and France alone — something which will cost Belgium more in the long run.Third, considering that Dexia is leveraged by a factor of 60-1 (for comparison, Lehman Brothers was only 30-1) and because it’s already 35-percent owned by the state, this is a bank that is going to be suffering far greater losses than normal because it’s extraordinarily damaged.Dexia has over 500 billion euros in assets and 20 billion of those are government debts of Portugal, Italy and Greece. So let’s assume for the moment that the bailout only costs the Belgian government about 30 billion euros — which we see as fairly conservative. That alone would be sufficient to increase Belgium’s national debt load to 110 percent of GDP, putting them within easy reach of where Italy is right now.Fourth, Dexia is a leading source of financing for the Belgian government – it’s not there anymore. Belgium is going to have to find another way to raise money on international markets — not just to cover the bailout but to cover its normal activities. That’s becoming increasingly difficult for states that have high debt and low government competency, and Belgium is certainly in that list. It’s now been over 480 days since Belgium has had a government, and last month its prime minister decided that he was going to quit. Added together, Belgium is being pushed very very close to needing a state bailout of its own.

• Europe: A Shifting Battleground, Part 1There are two important events coming up in Central Europe this weekend: the first being a summit of the Visegrad Four countries and the second is general elections in Poland. These two events give STRATFOR the opportunity to examine the importance of the region in the current context and looking forward as well.The first event is the Visegrad summit which will take place in Hungary from Oct. 7 to the 8. The presidents of the four Visegrad states, which include Poland, Czech Republic, Hungary and Slovakia, will all be in attendance at the summit, which will mark the twentieth anniversary of the grouping. The summit will also mark the achievements of the bloc, which is most notably the introduction of all four Visgrad countries into the European Union and into NATO in the 2000s.But more importantly the summit will be an opportunity to gauge where the bloc is headed in the future. There’s no shortage of problems in Europe right now, ranging from the eurozone debt crisis to growing pressures and divisions on NATO. It will thus be key to see whether the four Visegrad countries can show the same level of cooperation in addressing the issues that these two blocs face, as they did in joining them.The second important event of this coming weekend will be the Polish general elections, which will take place on Oct. 9. These elections are, at this point, closely contested between the ruling Civic Platform Party of Prime Minister Donald Tusk and the opposition PiS party. But regardless of who wins the elections, there are deeper geopolitical issues that are facing Poland right now that any government would need to handle. While Poland has shown nascent signs of emerging as a leader of Central Europe, Warsaw is still trying to find its place within wider Europe.It’s often left out discussions with major European countries like Germany and France, specifically over important issues like the eurozone debt crisis. The prevailing question in Poland is how the country can become a member of the group of established Western European countries, while also maintaining a leadership role in Central and Eastern Europe via initiatives like the Visegrad Four and the Eastern Partnership Program, which is a Polish led initiative to bring six former Soviet countries closer to the EU.This question has become even more important for Poland as a resurgent Russia has been strengthening its relationship with key Western European countries, which is a concerning development for Warsaw. Therefore, no matter what declarations are made at the Visegrad summit and no matter which party gets more of votes in the Polish general elections, both events are subject to deeper geopolitical forces that will continue to shape the region regardless of policies or personalities.

SummaryGermany’s parliament voted Oct. 26 to limit the German commitment to European bailouts. This move shows Germany’s unwillingness to continue serving as the primary source of funding for Europe as a whole. This means circumstances within Europe must shift in order for the European Union and the eurozone to survive the current financial crisis. Sharp writedowns of Greek debt would have to not trigger a financial meltdown, EU member states would have to put the union’s interests above their own, and outsiders would have to be persuaded to become the primary funders for the European bailout mechanism.

AnalysisSTRATFOR has watched with great interest as the eurozone crisis has unfolded over the past 21 months. In many ways this is the final stage of the post-Cold War interregnum. In the aftermath of World War II, the European Union (and its predecessors) was created to both constrain Germany and harness Germany’s economic dynamism to bolster French power. This was made possible because Europe was split and occupied by U.S. and Soviet forces, while Germany was denied the ability to unilaterally further its national interests. Those circumstances have changed. The Soviets left, the U.S. presence is a shadow of what it once was, and the Germans are reunified and once again looking out for themselves. With the Cold War over, the European Union is left to its own devices.

Germany benefits greatly from the European Union and the eurozone. These structures keep European competition firmly in the realm of economics and finance — areas in which the Germans, with their capital richness, central location, highly skilled labor and powerful industrial base, are well prepared to win. The European Union even created a regulatory structure that expressly puts German industry at an advantage.

But Germany is no longer willing to fund Europe, which it has done from immediately after World War II until very recently. The Germans have “bailed out” Europe several times. They paid massive war reparations — primarily to the French — after World War II. They funded the majority of the European Union’s development costs and agricultural subsidies for the first three decades of European integration. They paid — by themselves — for the rehabilitation of the former East Germany and contributed the largest share of funding for the rehabilitation of the rest of the former Soviet satellites. They also were forced to allow the other eurozone states to enter into the common currency at artificially depreciated currency exchange rates.

Dissatisfaction with this past role was apparent Oct. 26 when Germany’s parliament, the Bundestag, voted overwhelmingly to approve Chancellor Angela Merkel’s negotiating position at the EU summit later that day.

The Bundestag capped Germany’s financial guarantee to the European Financial Stability Facility (EFSF) — the eurozone’s bailout mechanism — at its current level of 211 billion euros ($294 billion). (The EFSF does not contain actual state cash; it uses government guarantees as backing to raise money on private bond markets. Contributing states only have to fill their guarantees if states undergoing bailout procedures default, in which case investors will be reimbursed with state money.) The Germans believe they have done enough, and they will no longer serve as Europe’s cash machine.

The other important prohibitive clause in the legislation the Bundestag approved is opposition to the European Central Bank’s (ECB’s) purchasing any state debt. Such purchases are already illegal under EU treaties, but in order to prevent financial meltdowns the ECB has been making indirect purchases (it lends money to banks to buy the debt and, through economic machinations, ends up holding the debt). The Germans see such actions not only as undermining a clause they fought very hard to get included in EU treaties, but also as directly undermining their efforts to get the weaker eurozone states to implement austerity measures. Whether the ECB will follow the German recommendation — and it is a recommendation, as the ECB is officially independent — remains to be seen. Mario Draghi, the Italian who will take over as ECB governor Nov. 1, has made it clear that he intends to maintain the purchase policy. Discussions at the summit should be quite vigorous.

Between the prohibition on new government guarantees and the demand on ECB actions, the Germans have constrained — perhaps outright eliminated — the two largest and most credible sources of potential funding for the eurozone’s bailout systems.

Instead, the Germans are asking for much deeper private and non-European participation. They want holders of Greek debt to take a much larger restructuring than the 21 percent discount agreed upon in July. Leaks from the International Monetary Fund (IMF) have echoed this, indicating that perhaps a 60-75 percent reduction in the bonds’ value is necessary if Greece is to ever recover. In trade, the Germans are demanding that the current EU/IMF monitoring of Greece’s finances become permanent.

Somewhat surprisingly, there is no clear message on how the bailout fund will be expanded to handle more bailouts. At its current size — 440 billion euros — it might be able to barely handle Spanish remediation, but a banking crisis or an Italian bailout would utterly overwhelm it. In Merkel’s Bundestag speech Oct. 26, the chancellor indicated that some sort of financial leveraging option would be used, but that is something that will be debated and decided at the EU summit later in the day. Merkel will need to return to the Bundestag to get the specifics ratified.

With such limited financing options, the European bailouts are to be funded more or less by the kindness of strangers: The EFSF’s existing funding limits are woefully inadequate for the tasks at hand, and if the Germans will not lead the way to increase its volume directly, eurozone governments are now wholly dependent upon outsiders to meet those funding commitments the eurozone governments refuse to. The Germans have stated very clearly what they expect from the rest of the European Union: austerity. With no more German guarantees on order and with a leveraging plan that is somewhat dubious, the only means many EU states have of avoiding bankruptcy is to make extremely deep budget cuts. These states are now in a bit of a race to implement austerity measures before the markets cut off funding.

To work, this strategy requires three very unlikely developments.

First, sharp writedowns of Greek debt must not start a general crisis. The largest holders of Greek debt are the Greek banking sector and the Greek pension system, so sharp writedowns could save Athens on interest payments, but they will only increase the pension burden by causing a Greek banking meltdown that will require the Greeks — both state and private — to more aggressively tap the EFSF (which has not yet been expanded). Even this assumes that the banks agree to a “voluntary” restructuring and do not simply declare Greece to be in default, which would trigger the cascade of financial failures the Europeans have spent the past two years trying to avoid.

Second, all of Europe’s financially troubled governments would have to put the European Union and the euro ahead of their own survival. This is highly unlikely, but not (yet) impossible. The Slovak government has already fallen over the EFSF issue, but it still approved ratification. Additionally, in preparation for the Bundestag presentation and the subsequent summit, Merkel laid very heavily into one of Europe’s financial laggards: Italy. Merkel’s actions triggered a political crisis in Rome, where pension reforms were agreed upon but at the cost of the promised resignation of political and financial fixture Silvio Berlusconi as prime minister.

Third, forces beyond Europe would have to buy in, en masse, to the European bailout, likely without guarantees that their funds are completely safe. Under the pre-existing system any investors would be guaranteed to have 100 percent of their funds returned to them — courtesy largely of German taxpayers — should a weak state default. Under any leverage plan, that recovery percentage would be smaller; 20 percent is emerging as the likely number for an absolute guarantee. But the Europeans desperately need outsiders to buy in to provide the sort of bridge financing and financial safety nets required to keep Europe’s governments and banks afloat. To that end, EFSF chair Klaus Regling is already planning trips to China and Japan — the world’s largest holders of foreign currency reserves — to try and convince them to use their stored cash for assistance. Some purchases are likely, but if the Germans are unwilling to finance the rescue of a system they benefit from, it is difficult to envision others being willing to do more.

STRATFOR does not see any of these three scenarios as being particularly likely. But without a great deal of financial commitment from Germany and the other, richer eurozone states, this is what must happen if the eurozone is to survive.

European Disunity Halts Solutions to CrisisEurozone leaders gathered in a summit Wednesday — the fourth in less than a week — out of which they had hoped to issue a firm line to address the financial crisis that has now reached its 21st month. Meanwhile — and according to STRATFOR, more importantly — the German parliament voted overwhelmingly to bar any further expansion of European bailout structures that might require a greater contribution by Germany. There were three specific topics on the summit’s agenda. First, a major bank repair effort whose approval, it is hoped, could turn Europe’s damaged financial institutions into a source of strength, rather than a weakness. Second, a write-down of Greek debt — by at least half — that would give Greece’s economy a chance to recover, rather than drowning in interest payments. Finally, the summit was intended to seek an expansion of the eurozone bailout fund that would give the latter the ammunition to assist — if not directly underwrite — the broader European recovery effort.“As the vote in the German parliament shows, even in the face of financial collapse there is little desire to take the steps necessary to save the structures of modern Europe.”Of the three, only the first goal solidified, and even then only in part. While reports late in the day suggest that a voluntary write-down of 50 percent of the value of Greek bonds has been agreed to by bondholders, the exact details of the plan are not clear. Meanwhile, the Europeans agreed to increase banks’ capital adequacy ratios — the amount of cash that banks must hold in reserve — up to 9 percent by June of 2012, something that EU leaders estimated will cost about 100 billion euros. Considering that by the EU’s own numbers that reaching that degree of a security blanket would cost — conservatively — 200 billion euros without even pretending to address the banking sector’s other problems, the agreement fell well short of offering a comprehensive solution to the financial problems facing Europe. On the questions about Greek debt and about bailouts for struggling sovereign states, the Europeans asserted that they had “reached agreement,” but put off any specific decisions until the next major summit.Europe’s financial crisis is getting worse by the week. What started nearly two years ago with Greece’s sovereign debt crisis has since spread to a half dozen countries — even affecting European heavyweight France — as well as most of the Continent’s major banks. What has not spread is the willingness of any particular European state to apply the necessary volume of resources to address the crisis. In fact, as the vote in the German parliament shows, even in the face of financial collapse there is little desire to take the steps necessary to save the structures of modern Europe.Such reluctance is understandable; the price to stave off Europe’s crisis is remarkably high. STRATFOR estimates that an effective attempt to tackle the European crisis would require bailout resources of about 2 trillion euros. Simply arriving at the current level of less than 500 billion euros required a strenuous effort.The European Central Bank (ECB) does not have full authority over monetary policy and banks in a manner similar to the U.S. Federal Reserve, the Bank of England or the Central Bank of Paraguay. When negotiating the Treaty on Monetary Union, European states reserved control over their own banks, ceding the least amount of authority possible to the ECB. The system was only sustainable — politically, economically and financially — as long as everyone was profiting. With the arrival of multiple debt crises and banking crises and considering a languishing global export market, the kind of economy that allowed this system to work is gone and unlikely soon to return.Considering Europe’s political and economic disunity, the EU’s host of financial and institutional shortcomings, the sheer size of the problem and the ever-increasing pressure on governments and banks alike, perhaps the most notable outcome after a week of largely failed summits was that the eurozone remained intact. However, on the floor of the German Bundestag on Wednesday, it was made abundantly clear that the one country that might have the financial resources to resolve the crisis will not be sharing them. Neither the common currency nor the common market can exist in a Europe in which the union’s members are unwilling to share burdens and follow collective rules. Germany at present is focused on the rules, while the countries in need are focused on the burdens. Both approaches are correct in their own way, yet both are wrong.Despite failing to articulate the specifics of any credible financial resolution to Europe’s debt crisis, this was about as good of a political response as Europe could hope for given the circumstances. By alluding to — but not mandating — a restructuring, no crushing pressure has been put on the banks, yet. By not announcing the details of how the European Financial Stability Facility will be expanded, European leaders have denied critics for now the opportunity to proclaim failure. That Germany, the one country whose participation is required in any solution for Europe, is pursuing its own interests in such a brash manner does not bode well for Europe’s future.

PARIS — A day after European leaders unveiled their latest plan to save the euro, top officials opened talks with China in an effort to lure tens of billions of dollars in additional cash, giving China perhaps its biggest opportunity yet to exercise financial clout in the Western world. China is expected to demand significant concessions, including financial guarantees and limits on what Beijing sees as discriminatory trade policies, in exchange for any investment in Europe’s emergency stability fund. The head of the rescue fund, Klaus Regling, got a cautious reply from Chinese officials Friday during a visit to Beijing, where he said he did not expect to reach an investment deal with China anytime soon. A senior Chinese official, Vice Finance Minister Zhu Guangyao, said China — like the rest of the world — was still waiting for the Europeans to deliver crucial details on how the rescue fund, the European Financial Stability Facility, would operate and be profitable before deciding on whether to participate. That Europe would turn so openly to China to help stabilize the debt crisis shows how quickly the Chinese economic juggernaut has risen on the world stage. Indeed, if China comes to Europe’s aid, it will signal a new international order, with China beginning to rival the role long played by the United States as the world’s pivotal financial power. “This would be a tectonic shift,” said Pieter P. Bottelier, an expert on China who teaches at the School of Advanced International Studies at Johns Hopkins University. “It would be so important economically and politically.” Arvind Subramanian, a senior fellow at the Peterson Institute for International Economics in Washington, said Europe’s appeal was another sign that China was already a dominant global power. “China’s power is more imminent, broader in scope and greater in magnitude than anyone imagines,” he said. “For instance, China’s currency is already having a negative effect not just on the U.S. and Europe, but on everyone else, too. And the rest of the world can’t do anything about it. If that’s not dominance, what is?” Europe has turned to Beijing and a handful of other emerging market economies to consider investing in the fund to supplement contributions by the 17 countries that use the euro. Outside investment was presented as critical for the Europeans to create a financial firewall of up to $1.4 trillion to prevent the debt crisis that started in Greece from ravaging larger countries, including Italy and Spain. In a sign that the crisis was far from over and that investors were still wary of Italy’s political paralysis and its huge debt, it was obliged on Friday to pay the highest rate in more than a decade to sell a new bond issue. The fear is that a failure to contain the crisis would lead to contagion in global financial markets on par with the Lehman Brothers debacle, and deliver a blow not only to the economies of Europe, but also to the United States and other major trading partners. Such a deterioration would certainly be bad news for China, which could hardly afford to see two of its biggest markets hobbled at the same time. China has a $3.2 trillion nest egg in foreign reserves, by far the largest hoard of foreign currency in the world, and it needs to find places to park those reserves rather than convert them all to Chinese renminbi, a step that could set off domestic inflation and lead to sharp appreciation in the currency’s value. Europeans know that China is eager to move some of the money out of its vast pile of United States Treasury securities, and they are pushing the Continent’s crisis as a good opportunity to invest on the cheap. Hours after European leaders unveiled their grand plan, President Nicolas Sarkozy of France called President Hu Jintao to say that Europe was still looking for some cash, and lobbied Beijing to play a “major role” in helping Europe get its house in order. Since the Europe crisis worsened two years ago, regional leaders once wary of China’s influence have rolled out the red carpet in hopes that China might be a savior for their ailing economies. China has already made deals to expand its footprint into choice Western European countries like Italy and Spain. Now, Chinese-owned companies run the biggest shipping port in Greece. They own highways and other crucial infrastructure, and are working to snap up other strategic businesses to anchor their presence on European soil.

But with Europe’s economy verging on its second recession in three years, Chinese officials are wary of taking too big of a risk abroad. China’s own economy is slowing, and there is growing unease about inflation and a property bubble. The income gap between the rich and the poor is widening, posing challenges to the leadership in Beijing. Chinese citizens have also been venting anger on the Internet about government investments in Europe that have turned out to be anything but profitable, including billions of euros worth of volatile bond holdings from stricken countries like Spain and Greece. And on a per capita basis China is still much poorer than Spain, Greece or Italy, meaning officials in Beijing could face a popular outcry if they poured resources into rescuing European countries or banks. “There is a lot of skepticism within the Communist Party, but also in Chinese public opinion, about China sinking money into European reserve assets,” said Jonathan Holslag, the head of research at the Brussels Institute of Contemporary China Studies. Still, lending a hand to Europe could prove a golden opportunity for China to increase its financial and political clout, and make it more of an equal among giants on the Continent, analysts say. Although leaders have pledged not to tie political demands to financial investments, Beijing has sought to get the European Union to recognize it as a market economy under global trade rules. Without that status, it is easier for other nations to initiate trade proceedings against China. China is also eager to persuade Europe to drop its criticism of its currency valuation policies, especially at a time when the United States Congress is weighing legislation that would allow American companies to file trade cases against China on the basis of an undervalued renminbi. Another longstanding sore point is the arms embargo that Europe and the United States imposed on China after its bloody 1989 crackdown on protesters in Tiananmen Square. The European Union recently considered easing the ban, but the United States has steadfastly objected. More than anything, lifting the ban would signal Europe’s acceptance of China as an equal on the world stage. It is not clear whether China would push that hard, though. As much as Europe wants the cash, Beijing knows that taking things too far could backfire. “When you look at the diplomatic agenda, most officials understand that trying to impose political conditions on financial support is not going to work, and might even be counterproductive,” said Mr. Holslag, the Brussels Institute researcher. “If they become too blunt and assertive in attaching a lot of demands, that might lead to a defensive, if not protectionist, stance in Europe.” Moreover, Europe is China’s largest export market, so it may be in Beijing’s interest to help boost European stability, said an official close to the Chinese government’s deliberations although not directly involved in them. If a contribution is made to the European stabilization fund, he said, it is likely to be sizable, although smaller than those by the biggest European countries or the International Monetary Fund. What would be crucial, he said, is that Germany, France and the European Central Bank are behind the plan to expand the fund. “We are looking at China’s pile of reserves with envy, and hope the Chinese are willing to spend something on us,” said Paul de Grauwe, an economics professor at the University of Leuven in Belgium and an adviser to the European Commission. “But they surely don’t want to throw money at this except if they get an ironclad guarantee. If that doesn’t happen, I don’t think we should count on China to help us out.”

Europe’s rescue planThis week’s summit was supposed to put an end to the euro crisis. It hasn’tOct 29th 2011 | from the print edition

YOU can understand the self-congratulation. In the early hours of October 27th, after marathon talks, the leaders of the euro zone agreed on a “comprehensive package” to dispel the crisis that has been plaguing the euro zone for almost two years. They boosted a fund designed to shore up the euro zone’s troubled sovereign borrowers, drafted a plan to restore Europe’s banks, radically cut Greece’s burden of debt, and set out some ways to put the governance of the euro on a proper footing. After a summer overshadowed by the threat of financial collapse, they had shown the markets who was boss.

Yet in the light of day, the holes in the rescue plan are plain to see. The scheme is confused and unconvincing. Confused, because its financial engineering is too clever by half and vulnerable to unintended consequences. Unconvincing, because too many details are missing and the scheme at its core is not up to the job of safeguarding the euro.

This is the euro zone’s third comprehensive package this year. It is unlikely to be its last.

Words are cheap…

The summit’s most notable achievement was to forge an agreement to write down the Greek debt held by the private sector by 50%. This newspaper has long argued for such a move. Yet an essential counterpart to the Greek writedown is a credible firewall around heavily indebted yet solvent borrowers such as Italy. That is the only way of restoring confidence and protecting European banks’ balance-sheets, thus ensuring that they can get on with the business of lending.

Unfortunately the euro zone’s firewall is the weakest part of the deal (see article). Europe’s main rescue fund, the European Financial Stability Facility (EFSF), does not have enough money to withstand a run on Italy and Spain. Germany and the European Central Bank (ECB) have ruled out the only source of unlimited support: the central bank itself. The euro zone’s northern creditor governments have refused to put more of their own money into the pot.

Instead they have come up with two schemes to stretch the EFSF. One is to use it to insure the first losses if any new bonds are written down. In theory, this means that the rescue fund’s power could be magnified several times. But in practice, such “credit enhancement” may not yield much. Bond markets may be suspicious of guarantees made by countries that would themselves be vulnerable if their over-indebted neighbours suffered turmoil.

Under the second scheme, the EFSF would create a set of special-purpose vehicles financed by other investors, including sovereign-wealth funds. Again, there are reasons to doubt whether this will work. Each vehicle seems to be dedicated to a single country, so risk is not spread. And why should China or Brazil invest a lot in them when Germany is holding back from putting in more money?

Together, these schemes are supposed to extend the value of the EFSF to €1 trillion ($1.4 trillion) or more. Sadly, that looks more like an aspiration than a prediction. And because the EFSF bears the first losses, its capital is at greater risk of being wiped out than under a loan programme. This could taint France, which finances the rescue fund and has recently seen its AAA credit rating come under threat. Since the EFSF depends partly on France for its own credit rating, a French downgrade could undermine the rescue fund just when it is most needed.

If the foundations of the firewall are too shallow, then the bank plan plunges too deep. By the end of June 2012, banks are expected to establish a core-capital ratio of 9%. In principle, that is laudable. But if banks have months to reach their target, they can avoid raising new equity, which would dilute their shareholders' stakes, and instead move to the required ratio by shrinking their balance-sheets. That would be a terrible outcome: by depriving Europe’s economy of credit, it would worsen the downturn.

Then there is Greece. Although the size of the writedown is welcome, euro-zone leaders are desperate for it to be “voluntary”. That is because a default would trigger the bond-insurance contracts called credit-default swaps (CDSs). The fear is that a default could lead to chaos, because the CDS market is untested. That is true, but this implausibly large “voluntary” writedown will lead investors in other European sovereign bonds to doubt whether CDSs offer much protection. So while the EFSF scheme is designed to offer insurance to bondholders, the European leaders’ insistence that the Greek writedown be voluntary will make euro-zone debt harder to insure.

…but trust is nowhere to be found

Europe has got to this point because German politicians are convinced that without market pressure the euro zone’s troubled economies will slacken their efforts at reform (see article). Despite a list of promises presented to the summit by Silvio Berlusconi, Italy’s prime minister (see article), Germany has good reason to worry. But it needs to concentrate on institutional ways of disciplining profligate governments, rather than starving the rescue package of funds. As it is, this deal at best fails to solve the euro crisis; at worst it may even make it worse. As the shortcomings of each component become clear, investors’ fears will surely return, bond yields will rise and banks’ funding problems will worsen.

Yet again, disaster will loom. And yet again, the ECB will end up staving it off. Fortunately, Mario Draghi, the ECB’s incoming president, made it clear this week that he realises that is his job. But therein lies the tragedy of this summit. An ECB pledge of unlimited backing for solvent governments would have had a far better chance of solving the crisis months ago, and remains the best option today.

At this summit Europe’s leaders had hoped to prove that their resolve to back the euro was greater than the markets’ capacity to bet against it. For all the backslapping and brave words, they have once again failed. There will be more crises, and further summits. By the time they settle on a solution that works, the costs will have risen still further.

Papandreou announced on Monday that he would put a hard-fought rescue deal to a referendumI say "while it lasts" because the opposition is mobilising a parliamentary manoeuvre to bring down the government, which may succeed - returning Europe to its status quo of containable trauma.

If Greeks reject the 50% controlled default on the debts they owe to the banking sector, then the arithmetic I revealed on Newsnight on the eve of the Euro summit comes into play - without a 50% haircut, and a further 130bn euro bailout, on top of 110bn, Greek debt spirals out of control and the country goes bust.

At this point, the value of the debt falls to maybe 10% of its face value and Greece has broken all the rules of euro membership.

The euro leaders will be faced with the option of a forced transfer of taxpayers' money to shore up the entire Greek economy with no surety, and no "local representatives" as currently planned. Or Greece leaves the euro.

Most political economists I speak to believe this has been the logic all along, and brave though it has been for Prime Minister George Papandreou to try and buy time to do a proper structural reform of Greece, the implosion of Spain and Italy has robbed him of that time.

Greeks - even those fiercely opposed to Pasok from the left and right - are resigned to the fact that the country faces years of painful restructuring. The real question at issue is a) under whose control and b) in whose interest?

It is for this reason that, while the Greek CP wants out of the euro, the growingly influential far left parliamentary group SYRIZA does not, and neither does the hard-right religious party LAOS. Everybody can see that an external devaluation will be chaotic, painful and cause its own kind of social unrest, just as the attempted internal devaluation is doing.

But events are moving fast. Even as the Greek centre-left toys with the concept of repudiating "odious" debt, as per Latin America in the 1990s, the debt is being concentrated into the hands of other sovereigns - the European Central Bank (ECB), the International Monetary Fund (IMF), other governments…

The reason the markets are scared is not just because of the difference between 50% and 90% default, it is because in the old scenario (AKA the one we agreed on last Thursday morning!) this sovereign-held debt was out of the reckoning. An "Oxi" vote (it means "No" and was scrawled on thousands of banners hung from balconies last Thursday) would signal default across the whole range of debt, causing new turmoil for European states.

What caused Mr Papandreou's sudden move? Even some of the MPs closest to him had no idea it was going to happen.

Many of my Twitter correspondents suggest it was the vehemence of "Oxi Day" last week, leading to clashes between parading soldiers and protesters and local Pasok politicians getting hounded off the parades.

Pasok remains a very well rooted social democratic party, with multi-generational networks inside every village. If the village guys start ringing up and saying - there is no way we can hold it - Mr Papandreou is politician enough to hear this.

Another potential reason is capital flight. Anecdotal evidence suggests that the Greek elite are buying up property in London just as fast as they can find berths in Poole for their yachts. They are voting with their spinnakers, on the basis that the game is up. In any future Greece on offer, they will have to start paying taxes and they do not want to.

One banker told me the Greek super-rich have mostly left.

The one thing governments have that investment banks do not is intelligence services with the power to wiretap people. If you ever wonder why serving politicians go grey so quickly, it is in part because they see the intelligence. So Mr Papandreou may have looked at the file and said, I can't sell this to my party, nor to my voters, and the business elite are emigrating en masse, so throw the dice.

Referendums are, always, basically a coin-toss, an all-chips on the black romantic gesture. Right now, the scale of EU-level mobilisiation to dissuade Mr Papandreou is huge.

But if Greece votes no - and goes for euro-exit - there are several plans in the process of being published that explain what you have to do. Close the banks for days, ration food and energy, institute strict capital controls - with most probably a few fast patrol boats at Glyfada harbour to check every departing yacht for cash and bonds.

Later, you get massive devaluation, with inflation; your non-sovereign debts become instantly doubled so you cannot pay them (i.e., the stock of Greek private debt to external lenders, for example, or, intra-corporate debts).

Finally, you get the chance to become competitive again. (I base this on SOAS professor Costas Lapavitsas' upcoming document, which he has verbally outlined to me).

However, despite this very, very unappealing prospect, you are at least in control of your own economy and you do not have foreign civil servants dictating what ministers can do.

One reason so many Greeks have told me this route is impossible is because there is no Kirchner - no left-leaning autarchic politician who can pose as the tribune of the nation and create a narrative around the default process, as Nestor Kirchner did in Argentina. Nobody on the right wants to do it either. And that is Mr Papandreou's gamble - that nobody outside the KKE will present a coherent alternative to a yes vote, and that the KKE does not want power.

That is how it looks from the balcony of a small hotel in Cannes this morning. When the politicians get here, I will let you know what the whites of their eyes are telling me.

Interesting story. This line reminds me of issues here: "One banker told me the Greek super-rich have mostly left." One critical component of the 99% rule, Rob Peter to Pay Paul, is that you don't need Peter's consent, but you will need to lock the exits.

The G-20 Summit Amid Escalation of the European CrisisFive EU summits in the past two weeks have failed to stem the European financial crisis. In fact, by some measures the agreements reached have made it worse. European leaders proved unwilling to commit more of their own financial resources to the ongoing bailout program. So the European Financial Stability Facility (EFSF), which until recently claimed 440 billion euros of funding capacity and offered full guarantees for any investment in European bailouts, now will guarantee at most 25 percent. The idea is that the facility could now stretch four times as far. But as Klaus Regling, the facility’s manager, discovered during a visit to East Asia, no one is interested in investing in the EFSF if the guarantees are gone. Europe’s bailout fund has gone from a funding capacity of 440 billion euros in fairly certain cash, to at best a far lesser amount.“Europe’s politicians are losing their ability to manage the European crisis.”In the meantime, Greek Prime Minister George Papandreou announced plans to refer the eurozone’s bailout program for his country to a public referendum (assuming he himself survives a confidence vote on Friday). The Greeks are furious at being forced to operate under eurozone-mandated austerity, which leaves the country little hope of ever growing out from under their debt load, despite sharp write-downs negotiated as part of the bailout package. Should the Greeks vote down the bailout program, its funds will stop flowing to the country. Greece will default and be pushed, either by its own economic circumstances or by its European partners, out of the eurozone. Financial markets will shut out any other damaged states — most notably Italy — and the threat of default will repeat on a far larger scale. A meaningful bailout facility must be in place to keep the eurozone from breaking up.If we are indeed witnessing the beginning of the end of the European project, we may also be seeing the last of the Cold War’s geopolitical support structures unwind. One of the primary reasons for the EU’s formation was to serve as the economic muscle tissue on the security skeleton of NATO. The West used those two entities to forge the political, economic and military integration needed to fight the Cold War against the Soviet Union. But just as NATO has struggled to find a reason to continue existing in the new era, the EU has discovered that without NATO eliminating competition in Europe, the idea of sharing a common foreign policy and military policy, as well as common markets and currencies, is dubious at best.Europe’s politicians are losing their ability to manage the European crisis. A generation ago, Germany would have had no choice but to bail out Greece. But Germany is breaking free of its Cold War restrictions and has firmly resisted. A generation ago, Greece could have been made to accept the conditions of a bailout, regardless of the suffering inflicted. But the ties that bind Europe are no longer reinforced by the United States, and Greece is now at liberty to make its own decisions. A generation ago, Europeans would accept the decisions their leaders made. But with the pall of the Cold War gone, citizens across the Continent are choosing to follow nationalist inclinations at the expense of the European ideal. Nationalism isn’t creeping back into Europe — it has already arrived. It just hasn’t taken formal power yet.The present crop of European leaders is not familiar with a world in which Europe is simply the name of the continent on which they live. Most of them will be swept out of power by the current political changes.Only those politicians who learn to bolster their personal political standings with stances that benefit their own states will remain relevant. Case in point: French President Nicolas Sarkozy and German Chancellor Angela Merkel asserted today that no new bailout funds will flow to Greece until the results of the latter’s referendum are known. Such populist grandstanding may play well at home for a president facing a tough re-election vote this April, but it comes at the cost of nudging the Greek population to trigger a financial disaster: Greece will default far sooner if it loses its ongoing bailout support.This is the European backdrop as the Group of 20 meets in Cannes, France on Thursday and Friday. Europe’s crisis has advanced to the degree that European structures threaten to fall apart. The resources to fix these structures are available even now, but Europeans are refusing to share what they have with each other. For the leaders coming to Cannes, the summit promises a strong dose of drama. And it may empty of Europeans, who may spend most of the G-20 summit on the sidelines, holding their own meetings in an attempt to stave off any further escalation of the crisis. There is little that the visitors can do to help Europe if the Europeans are unwilling to help themselves; other visiting leaders at the G-20 summit can do little more than pass the time. Meanwhile, STRATFOR has to start imagining what the world might look like if Europe as we know it begins to unravel.

Vice President of Strategic Intelligence Rodger Baker and Senior Eurasia Analyst Lauren Goodrich discuss how Russia and China are looking to exploit the European debt crisis to their advantage.Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy.Related Links• In Europe’s Crisis, Russia Sees OpportunityColin: While Europe’s outlook is darkened by uncertainty, opportunity knocks for Russia and China as both look to seize the chance of taking advantage. Both have growing political influence and shedloads of cash, so what will they do? Welcome to Agenda, where STRATFOR’s leading analysts on Russia and China join me to discuss what Moscow and Beijing want.Colin: With me now are Lauren Goodrich and Rodger Baker, thanks for joining me. While the Europeans sort out their mess, the Russians and the Chinese have shedloads of cash. Are there some bargains to be had in Europe? Are the Russians going to take advantage of this, do you think?Lauren: The Russians are already taking advantage of it. The Russians are in negotiations at this time to pick up assets all across Europe, specifically in Central Europe. They are looking at things from energy firms, banks, credit unions, airports, ports… anything that gives them a strategic placement and foothold within Central Europe, something that they can use in the future. And Russia has plenty of cash to do this with. And so Russia right now is in negotiations with countries like the Czech Republic, Poland, Greece, of course, and then Italy to pick up assets.Colin: Even Greece?Lauren: Yes, in Greece they are picking up some of the largest assets. They are in negotiations and talks right now to pick up probably the state energy firms and maybe even Athens International Airport.Colin: And what about the Chinese?Rodger: The Chinese are really a lot more cautious than what we are seeing the Russians doing. The Chinese have talked about how the Europeans should get their own house in order, how the Europeans should have enough cash to do it themselves, and the Chinese are sending mixed signals depending upon what day of the week it is, depending upon which Chinese official it is. They are saying on the one hand we are willing to come in, we are willing to help out if Europe provides certain guarantees that our investments are going to be secured and that this will guarantee that the European Union and the eurozone will hold together. Or they are saying you know what, we really need to still watch, we need to see, we need to wait, we are just not so sure that Europe has its act in gear. And in some ways the Chinese get a little bit of a grand domestic PR (public relations) out of this. They get to seem the country that is the responsible economic country, at least for their home audience. They play this up, the same way they did toward the U.S. economic crisis, but in reality they are very concerned about the future of Europe.Colin: So far they have been mostly looking at resources in terms of overseas acquisitions, but in Europe there are some big industrial companies which are probably undervalued. Do you think they have got any interest in them?Rodger: The Chinese are looking at some of those. We have seen them show interest in the past. Things with technology, things in aerospace, in computer systems, ultimately things that would be related to dual-use technologies, they would love to get a better hold of. So they are watching those, but those are not necessarily going to be directly linked to the way in which they are looking the European investments. The Europeans are largely looking at China to invest in European bonds or to expand their purchase of European bonds, and that is where China is kind of holding back on right now.Colin: Right and the Russians, of course, must be interested in some of European technology?Lauren: Very much so. As far as technology, though, this is something that they have been looking into in a very long-term project. At this time though, with the crisis happening, they are looking to pick up very quick assets and things that give them political leverage. So where the Chinese seem to be doing things more financially motivated, economically motivated, or via technology, the Russians are thinking about the politics on this — how does this help them get leverage in Europe?Colin: Can we turn this on its head for a moment? Because look at the harm that the mess in Europe is doing to China and Russia. For example, Europe is China’s biggest export market and it must be damaging the Chinese economy.Rodger: For the last several years the Chinese economy has been struggling because of this European crisis, or in part because of the European crisis. And what it has done is it has taken a big toll on European exports, the combination of the U.S. and the European economic downturns, and that has brought to the fore inside China a very long-standing issue with the Chinese economy. The structural problems of the Chinese economy are now becoming very clear and very apparent. They have been known for a long time but they really have not been as visible.And so we see the Chinese government in this very mixed position. On the one hand, they would really like to see the European economy just suddenly pick back up, start buying Chinese exports again and allow the Chinese simply to brush away some of these deeper reforms that are necessary, at least put them aside for a while. On the other hand, the Chinese cannot really count on this European resurgence of purchasing power anytime soon, and that means that in the end their attention is focused more on their domestic economy, on what they can do to try to not only pass themselves over this crisis but maybe use this crisis of the moment that forces them into being able to bring about economic change inside China.Lauren: And this is very different than what we are seeing inside Russia. In Russia they are mainly worried because the Russians had counted on the Europeans to dump $100 billion in the next 3-5 years into modern technology, into the privatization programs and just in basic investment inside of the Russia. That money is not going to come anymore. Europe does not have $100 billion to dump inside Russia. So Russia is now having to revise its entire strategy for its economic future, which was supposed to be launched via these programs in the next few years. They are back to the drawing board.But this does not mean that Russia does not have the money to do it themselves. Russia has $100 billion, Russia has $600 billion. So they have the cash to do it themselves, but the Russians tend to like to have other people pay for things before they pay for things. And so that is why they are going to have to step up if they want these programs to move forward.Rodger: And this is an area, too, where we see the Chinese kind of keeping an eye on the Russians, because the Chinese have wanted a hand in a lot of this planned Russian privatization and sale of businesses. The Russians have been fairly reticent in allowing the Chinese in. The Chinese now see this as a potential opportunity, rather than to grab things in Europe necessarily, to grab things in Russia.Lauren: So we could start actually seeing, probably, a strategic partnership between Russia and China economically grow. Which there is not much economic…Colin: How likely is that?Rodger: The Chinese really have got two big issues with the Russians. Number one, they would like to get it little bit more influence over the Russian economy overall. China continues to sit in a place where, even though it is economically much more powerful than Russia, politically it sees Russia as still having a lot more clout. China makes a lot more noise, but Russia seems to be a lot more influential, particularly in critical places for China like Central Asia, where they are pulling their resources from. Even more these days in Southeast Asia, where Russia is selling arms to, nominally, China’s opponents in Southeast Asia. This is troubling.The second is energy, and the Russians and the Chinese go back and forth over energy prices. China wants to become a much larger consumer of Russian energy at a price much lower than what the Europeans pay. The Russians are not willing to make that deal with the Chinese.Lauren: Which we will see if that changes because right now, as far as Russian exports, out of all of Russian exports 50 percent go to the EU. And if the EU market starts shrinking and the majority of those exports are energy, Russia has to find another market. If they have to do it at a discount then… they are going to have to do something.Colin: Lauren what about the fallout on all of those countries that used to be part of the old Soviet Union? They went to Europe, basically, and this is where they had to be, this is the new thing for them, but now they must be looking at what is going on in Brussels and other European capitals and saying well maybe we should get closer to Russia again.Lauren: Well the key country in that one is Ukraine. Ukraine has had a plan for 2011 to sign the very beginning steps to start a free trade agreement with Europe. It is on the shelf now, and no one in Brussels is returning Kiev’s phone calls at this time because they cannot even think about anything outside of the EU, let alone a country that Russia covets so much. The last thing Europe wants is to tick off Russia at a time that they are already in a crisis.Colin: And President Medvedev has got, I think, trips to four European capitals this month — Rome, Athens, Berlin and Paris. So what is he up to?Lauren: Yes. Well he is at the G-20 right now in France, he should be meeting with Sarkozy today. Next week he will be in Germany. What is interesting about the German visit, though, is that they will be discussing economics and Medvedev does have his economic team with him. But it is to launch the Nord Stream natural gas pipeline that directly connects Germany and Russia. So it is a very symbolic show of having Russia and Germany be such great partners together at a time when Europe is dividing within this crisis.Colin: And the Chinese? They must be looking at these energy partnerships, and they need energy, and saying hey, we had better be part of this.Rodger: They are watching energy partnerships. I think the Chinese probably will not be able to do much on the European front. Again, they are looking at being able to pull from eastern Russia and see what they can get out of that. And in some sense they hope that if the Europeans are going to continue to slow down, that will slow down the amount of energy going to Europe and require Russia to sell to them. What the Chinese are looking for is if they can see enough desperation in the European Union for Chinese money that they can exploit that.The big thing on the table, I think, for the Chinese that they would be willing to put a lot of money down on is if the Europeans stop the arms embargo on China that they put in place in 1989, and that opens up new streams of technology for their own weapons development, for their own military improvements. That would be something for the Chinese that they would see very worthwhile to go ahead and lay down a whole load of cash.Colin: Fascinating. Look, we will have to leave it there. Lauren and Rodger, thank you very much indeed.Rodger: Thank you.Colin: And that is Agenda for this week. Thanks for joining us. Bye for now.

Also last night, the chairman of the supervisory board of China Investment Corporation, the country’s sovereign wealth fund, put further distance between China and the eurozone bail-out, saying that Europe’s bloated welfare state meant that people did not work hard enough.

“I think if you look at the troubles which happened in European countries, this is purely because of the accumulated troubles of their worn out welfare societies,” Jin Liqun said in an interview with Al Jazeera television. “I think the labour laws are outdated – the labour laws induce sloth, indolence rather than hard working. The incentive system is totally out of whack.”

Eurozone leaders had been hoping that China would use some of its trade surplus to back the bail-out fund.

Vice President of Analysis Peter Zeihan explains how Italian debt has become the greatest threat to the eurozone.Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy.The Italian government eked out a legislative victory today, but the victory was a hollow one. Only 308 of the parliament’s 630 MPs voted for the government’s budget, eight shy of a majority. The bill only passed because the opposition chose to abstain rather than defeat the budget. Italy has now taken the lead position in the contest of what can unravel the euro.Greece, which has held that dubious honor for nearly two years, is actually now off the radar. Today the Greeks formed a national unity government that has the political authority to implement deep austerity while compartmentalizing political backlash against the system. It might not work, but it should last at least until the new year.But today’s Italian budget vote — or more specifically the decision of several previously pro-Berlusconi deputies to abstain with the opposition — puts Italy squarely in the crosshairs.Italy, like Greece, faces an insurmountable debt mountain. Italy, like Greece, has problems with political unity. But Italy, unlike Greece, has a leader who refuses to step aside in favor of a national unity government. Berlusconi has been at or near the top of the Italian political scene for a generation, and his People of Freedom party is his own personal political machine.Berlusconi now has seven days to repair that machine. If he cannot muster an additional eight votes by Nov. 15, his government will fall in a scheduled confidence vote. That would push Italy into an election at a time when markets are waking up to the fact that it is not Ireland or Spain or even Greece that is the biggest threat to the eurozone. It is Italy.Even in the worst-case scenario Greece only has about 350 billion euro of debt outstanding, most of which now is held either internally or by the European Central Bank. Italy has nearly 2 trillion euro in outstanding debt. An Italian credit cutoff would trigger a financial meltdown across Europe that would both be immediate and catastrophic.Avoiding that would require a new Italian government without going through one of Italy’s famously destabilizing elections. In the aftermath of today’s budget vote, Berlusconi claims that he will resign after a series of austerity laws are adopted, ushering in a new unity government. Votes on those laws, however, are scheduled to be held after the confidence vote, so it’s not clear whether this is truly turning the page or simply stalling for time.